You’ve seen the news about the recent bank closures and it’s probably made you take a look at your own financial institution and your money.
Did you know that the FDIC only insures up to $250K per depositor entity? (For a joint personal account, the limit is $500K.) The insurance program was created way back in 1933 and it protects things like checking and savings accounts to name a few, but does not protect other things such as money market accounts, stock investments or mutual funds.
People did not see this coming and that is a problem for a number of reasons. Regulations on reporting were loosened during the prior administration, which allowed banks to potentially have more volatility. And banks are a business, so they are trying to make money just like everyone else and can come across problems just like any other business. So, what can you do to protect your assets?
In your business (and your personal life), you need to evaluate your specific risks. That is the first step – identifying the risk. Then, in order to mitigate the risks, there are a variety of options, including diversification, insurance, controls, and even accepting the risk. Here are a few areas to review in your business as it relates to risk.
Again, the FDIC insures up to $250K per entity per banking institution and this is just for checking and savings accounts. (Note: there will be many discussions on this in the months ahead, including increasing that limit or even having no limit AND only checking and savings accounts are insured, not money market accounts.) As the rules stand now, however, if you have more than that amount in a bank, what are your options?
Diversify. You can open additional accounts in multiple banks. This may be operationally hard to do, so consider how it will affect the company processes. You can move money from the checking account to an investment account, which is not insured, so this may not be a good option. You can also purchase bonds or CD’s, however, each of these have inherent risks, as well.
Key Person in the Organization
What if something would happen to that key person? What happens to the company?
Key Person insurance is available, which is basically a life insurance policy on a top executive or other member whose death would greatly impact the company. While monetarily this is beneficial, the knowledge that person brought to the team is lost, so you must have process documentation and succession plans in place. No one person in your organization should hold all the information to your operations.
Are you reliant on one or two vendors? What if that vendor cannot deliver or goes out of business?
I have seen clients dealing with issues to their supply chain because of natural disasters like floods and fires and even things like a rail strike. Yes, these are things completely out of their control, yet there still needs to be a plan in place for the unexpected.
During the pandemic, shipping costs rose astronomically and, yes, it could happen again.
IF it happens again, will your margins cover the increased costs? You may not be able to pass the expense to your customers, especially when contracts are in place.
Does your business rely on one industry or just a few customers? How many customers are in the top 80% of your revenue? During the pandemic, restaurants closed and businesses such as restaurant supply companies closed as well, as they were totally reliant on that industry.
Look at your customers and assess the risk if your 5 largest customers/industry were to close. What would your company do? Do you have a pipeline to fill the void?
Where is your data housed? Are there backups in various locations? If you have paper documents, are they also stored electronically?
What if your business is the victim of ransomware or another cyber security attack? Will you lose customers?
How does new technology change your business? Does AI (and that seems to be increasing in capability every day) affect your business?
Systems will change, break and things will go down. Do you remember in October of 2021 when Facebook, Messenger, Instagram, WhatsApp, Mapillary and Oculus all went down for almost an entire work day? And it was a back-end issue, a service configuration, that even affected their internal practices. People relying on those networks were shocked and even Facebook lost tens of millions of dollars in that short time frame.
There always needs to be a backup plan in place. Even something as simple as the power going out. My team is 100% remote, and located in different areas of the country. A few weeks ago, one of my employees, located in Wisconsin, had no power due to the major snow storm that occurred. So, even though I might not be experiencing an issue where I am, someone on my team might be and it will affect their ability to connect and work.
There are experts on this and it’s vital for your business as there are always risks. Identify yours and get a plan in place. If you need help in any financial areas, please reach out.