Protecting businesses requires foresight, careful planning

Operations, accounting, personnel decisions they all require the attention of a small-business owner.

After addressing these areas, many small-business owners don't devote enough time to the financial aspects of their business that have a direct and significant future impact on themselves, their business partners, employees and their family.

Cash management is one area that business owners too frequently overlook. Properly managing cash accounts can make a big difference in a business's profitability.

Account choices

Perhaps a business's current financial institution limits its account choices. Commonplace short-term investments may not be the best way to put the business's money to work. The business may benefit from tax-free investment income. Maybe cash flow is unpredictable and liquidity is needed for unexpected events.

The business owner should investigate the full range of short-term investment opportunities available. Numerous cash management alternatives can provide higher return potential on idle cash.

Another overlooked issue is what would happen if the owner or a key employee such as a business partner would become disabled or die? The futures of too many small businesses are put at risk when owners are ill-prepared for the unexpected loss of a key employee.

Of the approximately five million businesses in the United States with 100 or fewer employees, only 20 percent have planned for their financial survival in the event of the loss of an owner or key employee.

Some businesses attempt to use cash reserves or commercial loans to keep the business running when the owner or another key employee dies or is disabled. Cash reserves, however, may quickly run out, and banks subsequently may be reluctant to make loans to businesses in distress.

Better solution

A better solution might be a key-em-ployee agreement funded by a life or disability insurance policy. Key employee insurance would help meet payroll, pay taxes and keep the business operational until replacement management can be hired and trained.

And what should a business owner do to protect himself against such tragic losses if there is more than one owner? A good solution might be a buy-sell agreement funded by a life insurance policy. This would facilitate a smooth transfer of cash from the estate of the deceased owner to the new owner.

Transitions

It may be hard to picture, but the time eventually comes when every business owner wants or needs to hand over the business to someone else. On the surface, these transitions may seem uncomplicated, but ownership succession raises concerns that may not be anticipated, particularly when family members are in-volved.

Process

The process of identifying and selecting those family members who are both capable and interested in being successors can be tough. Likewise, establishing contingency plans in the event of the death of a key shareholder can raise additional issues about management and ownership transitions.

Whether an owner transfers a business investment by selling, giving, or leaving it as an inheritance, a well-thought-out succession plan can be the difference between turbulent times and uninterrupted business success.

Charting a course to ensure a business's survival is never easy. But good planning, the advice of a team of trusted financial advisers and solid financial protection can make the job easier for owners and their families.

(The preceding article was provided by Timothy M. Reese, vice president of investments with A.G. Edwards & Sons, member SIPC.)