As COVID-19 continues to dominate the news cycle and impact daily life for people everywhere, a shift in the new normal is required. Here’s what I mean.
Take a look at the last handful of years. The economic landscape has allowed slightly more complacency to exist within businesses. Some of the belt-tightening lessons of the Great Recession wore off, and some businesses weren’t as strategic as they could have been.
Enter COVID-19, which has placed a huge importance on business fundamentals. There are a lot of directions I could take this blog, but the one I want to focus on is the critical fundamental of cash flow and cash management. With insurance and risk spend typically being the third most expensive line items for contractors, it makes sense to review some key risk management advice and opportunities.
1. Don’t Risk More Than You Can Afford
An old adage I’ve heard is that “No one has gone bankrupt from insurance premiums, but they have from uninsured claims.”
While saving on insurance spending can be a great opportunity to manage cash, it’s important to manage how coverage is trimmed. Before exposing your construction business to a catastrophic event by eliminating coverage or reducing limits, it’s worth exploring the impact of higher retentions or deductibles. A retention or deductible is often something that can impact the income statement but can easily be quantified and budgeted for. A lack of coverage or limits creates an unlimited loss potential for the business that can materially impact the balance sheet.
2. Consider Alternative Risk Options
For well-run construction companies with better-than-average loss experience, a loss-sensitive insurance program can be a great tool to reduce the overall insurance spend as opposed to traditional guaranteed-cost coverage.
In a loss-sensitive program, the policyholder participates in some calculated level of risk, while still transferring the volatile portion of risks. Assuming the contractor manages losses appropriately, this can present a significant savings potential.
In addition to the potential savings on the long-term cost of insurance, certain loss-sensitive programs provide significant cash flow advantages by allowing the loss funding necessary to remain within the company. Dollars are only spent when claims actually occur and are spent.
3. Investigate Payment Options
Managing cash flow during COVID-19 is critical. For a number of insurance products, the only payment plan offered by the insurance carriers is paid-in-full. When cash is tight, this could cause a contractor to finance the premium using an operating line of credit. Financing the premiums via an operating line of credit creates a balance sheet impact and can chew up liquidity for the operation.
An alternative to consider is using premium financing available through CSDZ. In a premium financing arrangement, premiums can be spread throughout the year for a nominal interest rate. The policy serves as the collateral for the transaction, and the debt stays off the balance sheet for the contractor.
In fact, we can bundle several policies together so the contractor receives just one invoice for all the financed coverage and, typically, can receive more favorable terms with a volume discount.
If your company is struggling to manage cash flow during COVID-19 or the ensuing recovery, please reach out to CSDZ. We have many tools and resources to help! We’ve also been keeping our CSDZ COVID-19 Resource Center up to date with tips and tools to keep your business in the know. Check it out. It’s updated daily!
