Cecilia Farrow looks at how advisers might better serve the needs of their SME clients during a period when many in this sector are bearing the brunt of the labour shortages being experienced across the country…

A survey conducted by Perceptive on behalf of 2Degrees found that small businesses are bearing the brunt of the labour shortages being experienced across the country.

So how is it that many SMEs are still being offered an insurance solution which is calculated on the cost of replacing the business owner, when one of the most significant issues they face is the inability to recruit staff to meet their needs?

Given that we, as advisers to business owners, should understand the economic environment, and that our duty is to provide advice and solutions which are suitable to a client’s needs, then we have a responsibility to make an appropriate assessment of the financial risk and likely mitigations before recommending a course of action. This must start with a thorough understanding of the current situation of the business.

One of the most effective ways to do this is to start your consultation with the business owner by drawing up an operational diagram of their business. No matter what industry or size of business, there will be multiple functional or operational areas such as:

  • Finance
  • Admin
  • Sales
  • Services
  • Purchases
  • Quoting
  • Invoicing
  • Maintenance

The key difference in a small business is that the business owner – sometimes with the help of their spouse or a staff member – does almost every function including the provision of the service. So, you might wonder what’s the point of doing an operational diagram if every key function is done by the owner? Surely the business owner already knows that.

The key point is that it creates a picture of the whole business that you and the business owner can objectively look at and use as a framework for the risk discussion.

An operational diagram helps the business owner ‘step back’ and see the breadth of their role in the business and the broad range of skills needed to run the business in their absence.

In my experience it almost eliminates the response of “I just need someone to replace me“, to one of “what’s the impact if I’m not here?”.

Typically, when a business owner responds that way, it is because they are only thinking of the technical task they do as oppose to all the hats they wear throughout their week.

It also helps you as the adviser to step back and see that in most businesses it’s not just a case of replacing the direct revenue generating function of the business, but that even a very small enterprise requires a wide range of management functions to be completed for it to run successfully.

Once you and the business owner breakthrough the notion that it’s not just a simple case of replacing the labour function within the business, you will be able to have a more meaningful discussion about the problems the business will really face without the key person. Then you will be able to develop a financial risk forecast and solution which is more likely to solve the business problems.

I understand that insurance based on meeting the cost of replacing the key person has been, and still maybe is, an easy ‘sell’. But in reality, it has rarely been an appropriate solution for very small businesses.

In the current economic climate, it would seem hard to justify it as advice suited to a business owner’s circumstances and needs.

Mastering the competence to facilitate the operational diagram concept will help you have deeper and more meaningful discussions with your business clients, which will lead to better risk management outcomes.

Cecilia Farrow, Managing Director, FAP Services
Cecilia Farrow.

Cecilia Farrow is the Founder and Managing Director of the FAP Services Network, and has committed the past 25 years of her working life to establishing herself as an expert in the life, disability, and health risk management sector in business and personal risk. Farrow is the member Director for Risk on the board of Financial Advice New Zealand. The views expressed in this article are solely hers and are not intended to represent the views of Financial Advice New Zealand.