Podcast Interview: Business Expenses Insurance

Episode 6 – Expenses, Payments & Savings

00:00 - 32:22

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Amanda Fisher: Welcome to episode seven of the Seeing Through The Numbers podcast. Today I'm talking with Drew Browne from Sapience Financial about insuring business expenses.
Drew is a straight-talking Financial Adviser who believes life is not about money. He's focused on helping small business owners and their families protect and provide for those they love and what they are responsible for. A big believer in protecting your purpose, Drew believes when people feel secure, they live bigger lives and lead better businesses. His company Sapience Financial & Investment is a certified BCorp, and in 2017 he received the Westpac Businesses of Tomorrow award. Welcome Drew, to the show.

Drew Browne: Hi Amanda, I am really happy to be here.
Amanda Fisher: Excellent, so tell me a little bit about yourself and Sapience. I'm going to ask too many questions all at once, and what's a certified BCorp?

Drew Browne: My business is called Sapience Financial & Investment, and the word sapience actually means wisdom from unusual places. I suppose if you go have a look at the old English meaning, there's a little bit of a wry smile in there. And it's really, I suppose, an extension of understanding that business smarts is not just charisma, it's actually applying your mind to what's needed. The word sapience actually means wisdom from unusual places, and our logo is actually a logo that was designed from a South African tribe, where they actually understood the importance of wisdom and what they would do is they hire out their elders to the local tribe, who would then hire out their own elders back to the other tribe and they would exchange wisdom.

Amanda Fisher: Wow, that's awesome!
Drew Browne: It is, as I suppose the idea is that wisdom actually counts and there's a commercial exchange for it. I suppose like lots of things, we always like to say, "It's always best to learn from others experiences rather than make the mistakes yourself and have to pay for it." 

Amanda Fisher: True, true. Yes. Yeah, learning from other people's mistakes is always a cheaper option if we can do it.
Drew Browne: That is so true. And you asked what is a certified BCorp, a certified BCorp is actually a new international certification. And it's actually quite a large movement of businesses using business practices and principles for the benefit of the community around them. So a certified BCorp is an organization who has to apply for certification. They get judged on five key areas, and every two years we are monitored and we have to re-certify. And if you like, you could say, we compete with each other to be the best for the world, rather than best in the world.

Amanda Fisher: Wow, that's so cool. So wow, you're very different to most financial planning people that I've come across so, wow.
Drew Browne: Well that's good, because we believe that life is not about money, it's about so much more but when you apply a wisdom overlay, the reality is we live in a commercial world and there are commercial realities, and we all have to learn how to manage our cash flow.

Amanda Fisher: Very true, and that's a great lead into business expense insurance, which is something that ... I don't know, is it new or has it been around for a long time and no one knows about it? What's the story with that in terms of its history and where it's come from?
Drew Browne: Yeah, so it's a good point. Look, I started my career in financial services some 20 years ago, we won't count the years. And it arose out of a past career I had in law where I got sick. In fact, I got very sick, and I got so sick that I lost my contract with my employer. And I was off work for at least two years, and the problem was, I ran out of income. Now, when you run out of income and you no longer have a job, life is very difficult because there are fixed expenses that have to be paid. That was a time when I had a mortgage in the old government home fund days, and that was when interest rates were 19%.

Amanda Fisher: Ouch, ouch, ouch!
Drew Browne: For those people who haven't yet been through a recession, good for you because there's one coming.

Amanda Fisher: Yes, thanks for the heads up on that one, but..
Drew Browne: It is, we've got about, we've got three or four years and we're sorted, so get it together now, but anyway ...

Amanda Fisher: And it's tough when interest rates are that high, and I know there were some horrendous loans floating around at one point. By the sound of it, you were at that point, the rates were just ridiculously through the roof. Even more so than the ... sort of the ordinary, if you like, mortgage rates, which were still jolly high at that point in time as well. And times were really, really-
Drew Browne: Absolutely.

Amanda Fisher: Without an income, wow. That would have been tough survival.
Drew Browne: And what you can say is, the mortgage I was paying was in this year, 2018, the rate was four to five times higher than what was average. So, my life in financial services started when I realized, "I know nothing about this." No one's taught me even the basics about how to manage cash flow because what happened all of a sudden was a sonic boom of comprehension that I had fixed family expenses, that regardless of what I wanted to do, I could not avoid. The mortgage was fixed. The council rates were still fixed. Things like electricity and water, more or less, fixed. All of a sudden I realized, regardless of what's happening, there is a base level of expense that is required to keep, I suppose life and limb together. So, from that understanding, as I commenced business years later, it was always very front of mind that businesses have fixed expenses. There is a base level of income that you need to have for a base level of expenses. That's just there, you have the rent on the premises, you have your insurance, you have your professional costs. These things are there whether you're open for business or not. And, with all that, this is where business expenses comes in.  Now, business expenses is actually fixed business expenses. So, in the world of insurance, when we push away the risks away from our business and our family, we push them to an insurance company to hold on our behalf. Fixed business expenses are those expenses that we can't really fiddle, if you know what I mean. The rent is the rent, it is what it is. The wages are the wages, they are what they are. 

Amanda Fisher: Okay, so that includes wages as well, because I talked about fixed expenses versus variable expenses in the previous episode, and around the fact that fixed expenses are those expenses that you're going to have to have. Like you say, whether you've got an income or not, and knowing what that is part of identifying really kind of what your basic break-even number is, just to have the door open, let alone the fact that you've got then your variable expenses that will be specific to what the product that you're selling or the services you're providing. So, these business expenses are the fixed ones, but ... So, okay so tell me a bit more about what's included.  obviously the rent, you've mentioned wages, so yeah I haven't thought of wages as being fixed in there…
Drew Browne: Yeah, absolutely. And wages of your employees that aren't directly involved in generating a revenue, like your PA, like your admin team, like the people who make the widgets, whatever that is. These things, you could say are more contractual in nature, so if you go you could say your bank fees and charges are fixed regardless.

Amanda Fisher: Right.
Drew Browne: Your cleaning costs are normally fixed regardless. Electricity, gas, water, fixed normally regardless. The fees for your professional associations, interest payments on the business loans is fixed regardless. Leases of your office equipment, or the motor vehicles, or the forklift, fixed regardless. Loan repayments for capital expenses in business is fixed regardless. You can even have things like your payroll tax, hate that, printing and postage, your rates if you're in that situation where you own your premises and you're fighting with the council for the clean up. Contractual advertising, leasing fees. Believe it or not

Amanda Fisher: It covers a wide, wide range and a much broader range than I thought it could.
Drew Browne: Yeah.

Amanda Fisher: I kind of had in my mind, I guess, things like, yeah your rent but see, actually, when I think about it, salaries makes sense, so the wages, yes. But rent and perhaps your electricity, and some of those basic ones. 
Drew Browne: Telephone, your comms, internet, your PABX system, your point of sale. Because when you think about it, most of these things are contractual.

Amanda Fisher: Yes, got you.
Drew Browne: So, if you can see that it's more contractual, more likely than not you have to think about, is this a fixed expense? Now there's some things which are quite straight forward, but there's somethings that are a little bit new, and that's where working with a financial advisor that understands small business is useful because we go to the financial underwriters and we say, "Give us a ruling."

Amanda Fisher: Right.
Drew Browne: "We have this type of machine for this reason and this is what it does and the light goes bing. Our attitude is this is a contractual expense, yadda yadda." And we go from there. Now with all these things, once you realize that there is a base level of cost, you've got to scratch your head and say, "Running a family and running a business, it involves the same consideration." How be it the expenses are different, it's the same thing.

Amanda Fisher: It is, isn't it? And what's going to be surprising, I think for most people, will be how much ... I guess the vast proportion of a lot of business expenses, if you talk about your overhead type expenses, they all fall into this contractual

Drew Browne: They do.

Amanda Fisher: ... kind of fixed expenses, the variable ones will relate to more the actual delivery of service and the sale of a product and the hard costs of that, which is your cost of sales and for me, I always talk about cost of sales in a service based industry as including wages, or the salaries of the people that are delivering it but again, you can't just sack someone if you've had some money problems.
Drew Browne: No.

Amanda Fisher: Because you've got ... So how long does business expense insurance last for? When would you claim on it? What are the events that would trigger a claim? How long would the insurance pay on for?
Drew Browne: Yeah, good one. There's three things that we would need to think about. So ostensibly, the first thing is, if you are a sole operator and you are 100% responsible for the income that pays the expenses, you're 100% responsible.  But, for people that are in partnership, let's say they both do sales and they both bring in 50% of the revenue. In practical terms, you could say that they each are 50% liable for 50% of the expenses. So, the first thing is to realize who is the generator of the income that pays the expense? The second thing is, what are the trigger events? When you're looking at this insurance, this is what's called personal insurance, not general, the difference is quite straight forward. Personal insurance covers a person in something that happens to them, where general insurance might be glass breakage, which is things insurance. Business expenses insurance as I'm speaking of is a personal insurance product that will pay for 12 months if the person generating the income that pays expenses is either sick or injured, and can't work. If you are like my butcher who went on a double black diamond ski run, he actually had the good sense to call me the week before, just to make sure that his income protection would cover him if he had an accident, and of course it would. The good thing is that we also had business expenses in place because the reality is this, if you have income protection insurance in place, the law says the maximum you can insure is 75% of your income so let's make the numbers work. If you're earning 100k, the maximum you can insure that money for is 75%, which is 75k. Now pause here, normally people think, "Okay, I could skinny through, I could survive, I could recover on 75% of my income." But if you don't know what your fixed business expenses are, you're now having to pay those fixed costs from only three quarters of your previous income anyway, and that's where people come unstuck. So you'd need to have income protection that protects your ability to create the income and you have business expenses insurance which protects your ability to pay those expenses if you're sick or injured and can't work.

Amanda Fisher: Right, so this is in conjunction then with your personal sickness and accident?
Drew Browne: Now, this is the challenge. This is where you need to have a small business financial advisor who is across all of this, because now you're stepping into the murky world of some companies require you to have income protection and then as what's called a rider, they'll offer business expenses. But other companies, kind of better ones, say, "Hey, it's a separate issue. We'll give you separate insurance, separately for business expenses." The reality is, you need to find something that works as part of a strategy for what your business does, what your responsibilities are and that's where you'd work with an advisor like me.

Amanda Fisher: Right, okay so personal income protection insurance is always in my mind, and it does obviously, it covers my home bills. That covers the mortgage, the food costs, the whatever and yes, it's 75% so yeah, we'll be eating baked beans while I'm off sick but you know, hey, at least we'll pay the mortgage.
Drew Browne: Absolutely.

Amanda Fisher: But I'd never thought then about that fact that the business still has its expenses that need to be paid because the income that I have insured is what I take out of the business, and that's after I've paid all the business expenses.
Drew Browne: That's right.

Amanda Fisher: I guess, perfect example, my business is 100% reliant upon me in terms of the revenue so if something happened to me, then there would be no income coming through the business and yet, there would still be these fixed contractual requirements that would still need to be paid.
Drew Browne: Absolutely, and the idea behind business expenses insurance is that we need to make sure you still have a business to go back to when you get over your sickness or your injury.

Amanda Fisher: Right.
Drew Browne: If you look down that road, if there was no business to go back to, your chance of recovery might be a bit more delayed.

Amanda Fisher: Mm-hmm (affirmative), true.
Drew Browne: Because you'd certainly not be in a good mental health position. The importance of your fixed business expenses means that if you are one of the one in five statistics where something happens, you'll recover, you'll respond, and you'll rebound and there's a business there waiting for you. Locum costs are also covered by business expenses insurance, so if you're a solicitor and something goes wrong and you have a car accident, and you can't do what you need to do, you can bring in a locum and that's a fixed contractual cost.

Amanda Fisher: Ah, right, okay, so that's how particularly your solo business owners operate ... can continue the business on, is they're getting somebody in to manage the business. I guess if you've got the fixed overheads being covered by the insurance, then that helps to keep the doors open and have somebody step into your role in the business to keep it operational while you're dealing with it?
Drew Browne: Yeah, and the reality is, everyone's situation is very different. Obviously, our conversation today is very high level and so this is not advice for only one ear, but you need to look at what is your base number? What is the number you need in your family, what is the number you need in your business? It's really a great question to ask because before you can answer that, you've actually had to have thought through a number of cash flow issues.

Amanda Fisher: Yes, and part of that then is looking then at ... you've got your personal cash flow that would be covered by your income protection, you would potentially then have your business expenses covered by the business expense insurance, but then if something happened to you personally ... but then you'd also have general business insurance that would happen in the case of some calamity, like the fire, the glass break-in, some natural disaster or other disasters that might occur in your business premises that would stop you from doing business as well, but it is all about knowing what these numbers are and what the cash flow is and what the implications would be, which is coming back to everything I always talk about is, how does all this come back into the cash flow? Before we go on into that, I just wanted to ask you, when's the right time to be thinking about taking up business expense insurance? Is that at start up, when you're commercially viable when you're in a cash flow crisis? When's the right time to be thinking about this?

Drew Browne: Yeah, look, I think the best time to start thinking these things through is two-fold. At the point of start up, as part of your cash flow projections, put into those number sequences what the costs are to the business and simply realize that your fixed business insurance costs are just a fixed cost.

Amanda Fisher: They're part of those ... another contractual fixed cost and I guess part of that then is, is it expensive?
Drew Browne: No it's not, because it only lasts for 12 months, in practical terms, what my underwriters normally like to see is that there's been business activity for 12 months so we can verify the income. The best case scenario might be 18 months. I always say this is the one question you should ask your accountant four times a year. I always say make them work for their money, which is, "Hey, in the last quarter, what percentage of my revenue had to go to fixed business costs?" By normalizing that conversation, so you're looking at cases, a stable path, or no something odd happened, or you need to just normalize this conversation so start thinking about this before you start. Then, when you're at 12 months or 18 months of revenue and things are stable, that's when you'll be thinking about that, but especially for people who are funded in start-ups. So they may have a capital injection, they may take a loan, those people there, they need a greater level of cash flow management because if you have an injection of 300k from a venture capitalist or a family office, there are commercial expectations that they would have of you, that you are protecting the processes and the known risks that you are facing.

Amanda Fisher: Yeah, that's a good point. So is there some easy way of working out what those expenses are, how much they might add up to?
Drew Browne: We have a PDF document which lists the top most common fixed business expenses that people have. So I think there's 10 or a dozen items. Now, what we've done is put it into a single PDF with editable fields so people can simply download the document, type in what they believe are their costs and then at the end of the month, end of the quarter, tally how they are going. I always say, "Look, get it out of your head, get it on paper, get it into a dedicated document so you can say, 'This is part of my cash flow plan.'"

Amanda Fisher: That's perfect and I think having that where people can fill something in and look at it, I think it's great to be talking about it, obviously we are which is great, but for people to do  more than just think about it, but put it down in black and white, start to see the numbers, it's a bit like when I help people to create their forward cash flow and they look at the numbers and see what they look like and suddenly the lights go on and it's, "Oh wow." Good or bad, "Oh wow," as to what's happening, but it's there, it's so much easier when you can see it and I think to see just how much those fixed costs are, thank you so much for sharing that PDF with us. It will be in the show notes below and so do check that out and fill it out, have a look at it, listeners, and see what your numbers are. Then potentially start looking at ... thinking about in the first place, what would be the impact if you're unable to work, and maybe then start looking at what needs to be done to make sure you've got those insured so that if something does happen to you, you've got those costs covered and you're not having your family or someone else trying to deal with that on top of just your normal household bills that would be paid out of your income protection insurance.

So thank you so much for all of that, Drew. That's just opened my eyes to a whole extra bit that I didn't know. I'm a little bit aware of it, but not to the depth that you've gone into here for our listeners, so thank you very much for that. Before we finish up, I have a few different questions for you.
Drew Browne: Shoot.

Amanda Fisher: If you were to recommend to our listeners one business book that has made an impact on you, what would it be and why?
Drew Browne: Oh gee, there are so many good ones, aren't there? I think my all-time favourite business book is one from 1997, it's a bit old school, and it's called Intelligent Leadership. It's by an Alistair Mant, it's an Australian book, and it's about business leaders and the idea of understanding complexity and then exercising judgment. I suppose you could say it's old school, it's not about how you look, or the charisma that you have or not, it's about your
proven ability to do the job and to exercise judgment under pressure that actually has a reasoning behind it. So that's my favourite one, Intelligent Leadership, Alistair Mant.

Amanda Fisher: Okay, excellent, and we'll make a note of that and have that in the show notes for our listeners as well. What's your favourite business app that you're using at the moment? Why and how do you use it?
Drew Browne: Ooh, favourite ... that's an even harder question than a book, isn't it? I think the one I use a lot and I say, "Where would I be without it?" Is the good old Google Sites, the Google website builder, and I use that for our internal intranet. So all our data goes in there, all our education, all our learning, our conferences, we put into our Google Sites and our onboarding procedures, everything goes in there and I can't see how a business can work without its own intranet, its own repository of data. At some point as well, look, we can access it remotely, staff can leave comments about what's working, what's not. I think if you are a learning organization, and if you're not, you're not going to be in business tomorrow, if you are a learning organization, you've got to have your own intranet, and I use Google Sites for that. Love it, could not exist without
it.

Amanda Fisher: Okay, awesome, perfect. Just to finish up, what is the one piece of advice you'd give to our listeners to help them with their cash flow?
Drew Browne: My thinking is this. When people know better, they do better. I would say the one piece of advice is, work out what your base level is. Work out what is your cost to survive and then build upon that to the point where it's the cost to thrive.

Amanda Fisher: Exactly. What I'm always talking about is it's in the knowing of the numbers that you get the confidence and the clarity and the ability to make the decisions and take control of your business in terms of just knowing what's happening and being able to know when you need to plug a gap with some income because you're a bit short, or you need to know what your ... as you say, your baseline is. What's the minimum revenue you need to have every month just to keep the doors open? What's the minimum money you need to have every month to keep the doors open and have some extra for profit, effectively? Some extra their for enjoying and doing other things and perhaps some discretionary costs that just aren't in the baseline, which is pretty much a bare minimum to keep the doors open, whatever the doors look like, in business. So yeah, great
Drew Browne: Look Amanda, I've always said that when people feel more secure, they will lead a bigger life. So many business operators, through not knowing their numbers, force themselves to live smaller lives because they're not quite sure what an outcome might be, or they haven't got their head around forecasting. They live their lives in a way that seems to be very different from the reason why they began their small business journey. So when you know better, you'll do better, and our economy and our community, and our families need stronger businesses so we build stronger communities, so we have stronger families, and it starts with knowing your numbers.

Amanda Fisher: Yeah, exactly. Thank you and thank you very much for being on our podcast today. I've really enjoyed talking to you. As I say, I've learned a lot, I'm sure our listeners have learned a lot. All the contacts and links and details will be in the show notes below, so do check those out. Thank you again, Drew, for being on the show. 

Drew Browne: Amanda, it was great, thank you for sharing your wisdom with the community. I think this is a key issue that we can all put effort into and I think the result is so much better and so much bigger.

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