Lowering Your Liability

Lowering Your Liability
What if you were sued for an accident on your property? Or you were found at fault in a major traffic accident? An umbrella policy could help you keep you covered.

Umbrella liability insurance is relatively affordable and can be easily coordinated with your existing insurance policies.

As far as insurance goes, an umbrella or excess liability policy goes the extra mile. If you’re looking to bolster key policies, an excess liability policy can provide you with additional coverage at reasonable rates. Excess liability basically extends the coverage of your underlying policies, which might include general liability, commercial or business Auto policies, and possibly employers liability.

Here’s how it works: Let’s say you have a $1 million business auto policy with hired and non-owned auto coverage, which protects you if you have an employee using his or her personal vehicle to run a business-related errand. In addition, you have a $1 million excess liability policy. Unfortunately, the employee has an accident on the way to the office supply store, hitting another vehicle causing injury to a third party and your business is held liable. If the injured person is awarded $1.5 million in damages for hospital and other expenses your business auto policy covers the first $1 million and the excess liability covers the remainder.*

The real value of an excess liability is that, with one policy and for a relatively small premium, you can add coverage on top of a number of underlying policies. It won’t cover more specialized policies, such as professional liability or errors and omissions policies, but it does cover those key areas of common, general liability.

There are no hard-and-fast rules regarding the pricing of excess liability coverage, but it is typically inexpensive, depending on the type of business you own. An office-based business might pay, for example, between $350 and $500 per year for each $1 million in coverage.

When you put it in perspective, an excess liability policy is really about peace of mind. Furthermore, the premium is generally low and it may be a tax-deductible business expense.

Putting the Brakes on Negative Cash Flow

Putting the Brakes on Negative Cash Flow
Once cash flow starts to turn negative, it can be hard to get back in the black. Part of the issue is being armed against a negative cash flow tide. Having the information you need can help you take strategic steps regarding cost cutting, shedding customers, salaries and holding the business together as the tide rises.

First and foremost, says Dr. Charles W. Mulford, CPA, Director of Research at research firm Cash Flow Analytics, LLC, you need knowledge, in the form of a daily flash report or other consistent combination of daily and monthly reporting systems. “While most cash flow drivers aren’t measured well on a daily basis, certain drivers can change daily,” he says. “In particular, a careful A/R and A/P aging can provide an early indication of near-term cash flow trends. For some firms, daily sales orders and pricing trends can also give clues to near-term cash generation. Key components of operating expenses, like employee counts and advertising or other key operating expense orders, might also be reviewed often during the month.”

Declining Cash Flow Red Flags

Certainly, any business should have a cash flow model in place that simulates the business and allows cash flow forecasting that highlights early identification of shortfalls while there is still time to take remedial action, Mulford says. “There are also some fairly specific ‘red flags’ that can indicate the onset of short- or long-term cash flow issues,” he adds. They might include:

an inability to clear a revolving credit line when normally it is cleared;
the sudden use of overdraft financing when it hadn’t been used in the past;
an increasing need to push on vendors for longer terms;
declining gross margin;
an unexplained stall in sales;
projected growth for a firm with a negative “growth profile” (combination of operating cushion and growth-related working capital needs that require cash infusions to accommodate growth);
planned higher and continuing capital expenditure needs, and slowing working capital turnover (especially inventory and accounts receivable); and
high deferred tax liabilities and the implication for higher income taxes for a firm with declining capital expenditures.
If you’re experiencing a number of these issues, it may be time to speak with your financial or business advisor about the tactics you can employ to turn back a negative cash flow tide. “Consider the things you can do both for the short- and long-terms,” he says. “There are ways to shore up cash flow right now, but you need to think further out, such that cash flow becomes stronger not just in the next six months, but for years to come.”

Taking Strategic Steps

Mulford offers several strategic steps that might be worth considering in the near term and for stronger cash flow over time.

In the short term:
consider seeking significant discounts for early payment that significantly offset the financing costs of those funds;
utilize A/R factoring;
cut sales/promotion costs by focusing on current customers;
look for opportunities for prepaid sales (deferred revenue); or
consider short-term cuts in advertising or R&D.
For the long-term:
invest in labor-saving equipment financed with long-term capital to boost gross margin or lower SG&A (tax benefits will serve to reduce tax payments);
consider supply chain initiatives that lower inventory needs or push more inventory onto suppliers; or
consider an R&D joint venture that may give up some top-side in return for current cost sharing.
Going forward, Mulford envisions an economy typified by “sub-par growth, and slowed by gradually rising inflation, interest rates and, likely, higher taxes. It will be a difficult operating environment, but not one that precludes success. If you refuse to relax and relentlessly focus on the drivers behind cash flow, you can fight back against a negative cash flow.” Mulford outlines the drivers as:
An operating cushion—Gross margin, SG&A and, for tech firms, R&D.
Working capital—“Not just receivables, inventory and payables,” he says, “but prepaids, accruals and deferred revenue.”
Taxes paid—Take advantage of any and all federal and state tax credits and benefits.
Capital expenditures—If other costs can’t be reduced, consider lowering cap ex.