Business Insurance Explained

If you have just started a new enterprise or have been asked to look after the company’s insurance renewals, business insurance can at first seem a daunting proposition. After all, much of the language and industry jargon such as endorsements, indemnity levels and excess periods can at first appear alien.

Then there is the question of knowing what covers to get.

With the responsibility of ensuring that the business activities and property are completely covered from risks that the firm might face, a new small businessman may well also be confused by the plethora of covers, plans and policies that are available today.

Business insurance is however fairly simple even for newbies, if you break it down from the top.

There are basically two types of risk that a business may face in daily operations, these being business property risks and business liability risks.

All business insurance policies contain elements of the two risks either separate or combined under a single plan. If you need cover for business buildings and premises contents, you will need property insurance. If you need cover for the work you do, you will require liability insurance. Most businesses need elements of both.

Business property buildings insurance protects all risks to a business premises covering loss,material damage and consequential loss to all buildings, outbuildings, fixtures and fittings on the premises. The premiums are calculated on rebuilding costs of the business property and will also contain elements of public liability to protect a business against claims from the public of for example, a wall falling on a passer-by.

Property contents insurance covers loss or damage to the contents of the business premises. Business contents policies typically have provision to cover items such as furniture, tables and desks, computer equipment, telecommunications equipment, business electronic equipment, data, tools, machinery, stock, high risk stock, raw materials, fabricated, assembled, manufactured or stored goods and anything used in the daily operation on the business premises. Freight, cargo and goods in transit cover options provide insurance for the businesses property away from the premises.

Business property insurance polices are typically marketed by the type business property they provide insurance for. For example office insurance, shop insurance, hotel insurance and pub insurance are popular commercial property insurance schemes which contain all the relevant covers for each use of the property type.

Much commercial property is either rented or leased, in particular offices and shop space. Business insurance provides specialist cover for property owners of these types of premises with a let property insurance policy, which is tailor-made for business landlords.

Liability Insurance protects a business against all liabilities that the enterprise might be liable for as it carries out its daily actions. Liabilities are events which occur that could lead to claims against the proprietor, trader, owner, partnership or company. Liability insurance cover protects the company profits against all damages and costs incurred resulting from the claim.

Business Liability Insurance includes Public Liability Insurance, Employers Liability, Products Liability, Directors and Company Officers Liability and Professional Indemnity Insurance.

Public Liability protects the business profits against claims from members of the public and this cover forms the basis of a standard business insurance contract.

If you employ staff you will require by law Employers liability insurance which protects your business against claims resulting from accidents and injuries to paid employees and sub contractors whilst anywhere at work.

If you sell or provide goods or parts your business will need Products liability insurance.This cover is usually automatically included in for example, a shop insurance policy.

Nearly all business insurance polices sold, in particular those online, are what is known as combined business insurance or trade packages that have been specifically designed for particular trades or professions. Find one that is suitable for your particular company by carrying out a search for your trade, service or profession insurance. These combined business insurance policies contain all the covers you will need in your line of work, ensuring that if a claim against your company is made, you will be covered.

The company owners or directors can also purchase Directors & Officers Insurance or D & O insurance as it is often called, which covers them personally against both civil and criminal liabilities resulting from business activities.

Additionally professional services should purchase Professional Indemnity insurance which covers the service against the liability of any advice that might be given professionally and later turns out to be negligent.

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Ways to Improve Business Communication

Effective communication is very important to run a business successfully. Good communication can endear you among your clients, increase your brand image among your seniors, and cause you to be admired among those work under you. It can also help you in taking your business to the next level and earn you high profits. On the other hand, poor communication can limit the efficiency of your company. It may result in missing vital business deadlines, duplicity in work processes, and most importantly can suffer employee morale. According to a study conducted by Global English reveals, “97% of employees surveyed believe that poor communication as a result of inadequate business language skills can create misunderstanding”.

Often, there is a lot of disconnect in the communication process, which can prove very costly to a business. It may be verbal misinterpretations, lack of interaction, lost emails and unclear texts or poorly-worded messages. Effective communication – both internal and external, increase organization’s effectiveness, enables smooth operations and helps in reducing business contingencies. Communication is generally of two types – Digital and Interpersonal. Here are some useful tips to improve these two, that can benefit your organization and keep the things sailing smoothly.

Digital Communication: Most of the business communication is usually done using digital medium, like email. Writing email or text messages is easy when we are done with a friend. The target audience in business are corporate stakeholders, so it’s always better to be formal. Even a minor mistake in your written communication could negatively impact your credibility. It can result in loss of reputation and business as well. Below are the basic points you should follow while drafting a business proposal, email or other business letters:

  • Always treat emails like the real mails, not just the digital letters. While drafting an email, use powerful words, develop a natural voice, work toward your aim and present a clear deadline.
  • Craft the email carefully. Go back, check and edit for more clarity. Polish each and every sentence to keep the communication straight, positive and effective.
  • Don’t put any wrong or unclear information. Check your facts before sending the mail. Any wrong information makes you look like that you haven’t done your homework.
  • Don’t use any Emoticons, Colloquialisms and Slang, it may result in loss of translation and the person reading your mail may not understand what you are talking about. Keep it simple and to the point.
  • Choose the best subject line for your message. The subject line is the first introduction to the content of the message to the recipients’. Also, it helps in keeping your message out of spam box.
  • And, the most important is to archive all your business communication. Create folders to save all the old emails. It will help you in finding any communication easily in the future.

Interpersonal Communication: It is a face-to-face communication and involves exchanging information and the meaning via verbal and non-verbal messages. Sometimes, an email or a text just isn’t sufficient. Digital communication doesn’t involve any direct communication. Nobody sees you how your writing, but when you meet someone face-to-face, many things matter, such as your tone, body language and eye contact. Your message should be clear, concise and direct to the point. Add below mentioned tips in your interpersonal communication to make it meaningful:

  • Be confident while meeting your clients or superiors and don’t feel shy in person-to-person meetings. Maintain a proper eye contact to make a good impression.
  • Listen carefully and give your complete attention to the conversation. Understand what the opposite person is saying and then give your own thoughts.
  • Focus on your speech. Think before you speak and don’t get confused with your own words. Doing this, will dilute the purpose of face-to-face meeting.
  • Keep the communication professional, and avoid making it too personal. It’s good to befriend with people you are working, but don’t make it too friendly.
  • Never counter the opinion of your client, even if you disagree. It may offend them. Listen to them attentively, then keep your viewpoint and explain why you disagree with them. But, ensure to maintain a polite tone.
  • Ask questions to clear all your doubts and concerns. It will also help in holding the conversation and will generate new ideas that would be helpful in business.
  • These were the few suggestions, you can implement in your communication strategy and make it effective. Following these, will not only improve your business performance, but also personal improvements you make in your own life. It will also help boost your self-esteem and decision making and also make you stand out of the crowd. Effective communication is always about comprehending the other individual, not about forcing your opinions on others and winning an argument.
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Are Cell Phones Replacing Landlines for Businesses?

Landline phone invention dates way back in the 18th century as opposed to the first Motorola mobile phone invention in 1973 so this is like 107 years later. With this information being established, we can see that businesses in those days relied heavily on landline business phones for back and forth communication with their Customers, Clients, Suppliers, Business Partners and the list goes on.

As I write this article, it begs the question, what other means of urgent contact were there to get in touch with your suppliers or customers if they were not present to take your calls on the other end? Bearing in mind, the first mobile phone came in over a hundred years later. You might ask, What about an email? But then from research, the first ‘text’ was sent from a computer system to another computer system beside it, in 1971. I would suppose that not having alternative means of communication in those days, possibly resulted in loss of revenues not only for your business but also for your suppliers business and probably loss of local customers.

So, then as years went by, we have seen vast improvements in technology as it relates to communication. Most if not all of us have been partakers of these technologies over the years. In my humble opinion, I don’t think that cell phones are replacing landline phones for businesses, I think that we have to look at a landline phone and a mobile phone in terms of their LIMITATIONS and CAPABILITIES. In so doing, we can decide which one is more appropriate in a given situation.

For a business owner operating his business, he would want to ensure that he can get in touch with his Suppliers in a timely matter and so he wants to utilise all communication means necessary for the effective running of his business. He does not want to know that his customers are turned away from his business because he could not get in touch with his suppliers. This would be loss of revenues for his business and possibly loss of customers.

A landline phone is not so much a portable tool and so, that’s one of its limitations. He will now have to invest in a mobile phone which is a portable tool, therefore he will be able to make contact wherever he is. With all of this being said, in the early days of mobile phone design, my thinking was that its only purpose was to make calls and receive calls. I was really thinking wrong.

We are seeing the power of technology being played out in this piece of communication tool as we enter the 21st century. The capabilities of a mobile phone today outweighs that of a landline phone. A mobile phone with its applications and features today have now become a massive piece of marketing tool for any business today, but as I have said earlier, they both have their appropriate place in any Organisation and I believe this will be the case for years to come.

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Trading and Profit and Loss Account

Trading Account

As already discussed, first section of trading and profit and loss account is called trading account.

The aim of preparing trading account is to find out gross profit or gross loss while that of second section is to find out net profit or net loss.

Preparation of Trading Account

Trading account is prepared mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The difference between selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to calculate the gross earning, it is necessary to know:

(a) cost of goods sold.

(b) sales.

Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. n order to calculate the cost of sales it is necessary to know its meaning. The ‘cost of goods’ includes the purchase price of the goods plus expenses relating to purchase of goods and brining the goods to the place of business. In order to calculate the cost of goods ” we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula:

Opening stock + cost of purchases – closing stock = cost of sales

As already discussed that the purpose of preparing trading account is to calculate the gross profit of the business. It can be described as excess of amount of ‘Sales’ over ‘Cost of Sales’. This definition can be explained in terms of following equation:

Gross Profit = Sales-Cost of goods sold or (Sales + Closing Stock) -(Stock in the beginning + Purchases + Direct Expenses)

The opening stock and purchases along with buying and bringing expenses (direct exp.) are recorded the debit side whereas sales and closing stock is recorded on the credit side. If credit side is Jeater than the debit side the difference is written on the debit side as gross profit which is ultimately recorded on the credit side of profit and loss account. When the debit side exceeds the credit side, the difference is gross loss which is recorded at credit side and ultimately shown on the debit side of profit & loss account.

Usual Items in a Trading Account:

A) Debit Side

1. Opening Stock. It is the stock which remained unsold at the end of previous year. It must have been brought into books with the help of opening entry; so it always appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account. Of course, in the first year of a business there will be no opening stock.

2. Purchases. It is normally second item on the debit side of trading account. ‘Purchases’ mean total purchases i.e. cash plus credit purchases. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. Sometimes goods are received before the relevant invoice from the supplier. In such a situation, on the date of preparing final accounts an entry should be passed to debit the purchases account and to credit the suppliers’ account with the cost of goods.

3. Buying Expenses. All expenses relating to purchase of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and import duty etc.

4. Manufacturing Expenses. Such expenses are incurred by businessmen to manufacture or to render the goods in saleable condition viz., motive power, gas fuel, stores, royalties, factory expenses, foreman and supervisor’s salary etc.

Though manufacturing expenses are strictly to be taken in the manufacturing account since we are preparing only trading account, expenses of this type may also be included in the trading account.

(B) Credit Side

1. Sales. Sales mean total sales i.e. cash plus credit sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.

2. Closing Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. Normally closing stock is given outside the trial balance in that case it is shown on the credit side of trading account. But if it is given inside the trial balance, it is not to be shown on the credit side of trading account but appears only in the balance sheet as asset. Closing stock should be valued at cost or market price whichever is less.

Valuation of Closing Stock

The ascertain the value of closing stock it is necessary to make a complete inventory or list of all the items in the god own together with quantities. On the basis of physical observation the stock lists are prepared and the value of total stock is calculated on the basis of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each item is priced at cost, unless the market price is lower. Pricing an inventory at cost is easy if cost remains fixed. But prices remain fluctuating; so the valuation of stock is done on the basis of one of many valuation methods.

The preparation of trading account helps the trade to know the relationship between the costs be incurred and the revenues earned and the level of efficiency with which operations have been conducted. The ratio of gross profit to sales is very significant: it is arrived at :

Gross Profit X 100 / Sales

With the help of G.P. ratio he can ascertain as to how efficiently he is running the business higher the ratio, better will be the efficiency.

Closing Entries pertaining to trading Account

For transferring various accounts relating to goods and buying expenses, following closing entries recorded:

(i) For opening Stock: Debit trading account and credit stock account

(ii) For purchases: Debit trading account and credit purchases account, the amount being the et amount after deducting purchases returns.

(iii) For purchases returns: Debit purchases return account and credit purchases account.

(iv) For returns inwards: Debit sales account and credit sales return account

(v) For direct expenses: Debit trading account and credit direct expenses accounts individually.

(vi) For sales: Debit sales account and credit trading account. We will find that all the accounts as mentioned above will be closed with the exception of trading account

(vii) For closing stock: Debit closing stock account and credit trading account After recording above entries the trading account will be balanced and difference of two sides ascertained. If credit side is more the result is gross profit for which following entry is recorded.

(viii) For gross profit: Debit trading account and credit profit and loss account If the result is gross loss the above entry is reversed.

Profit and Loss Account

The profit and loss account is opened by recording the gross profit (on credit side) or gross loss (debit side).

For earning net profit a businessman has to incur many more expenses in addition to the direct expenses. Those expenses are deducted from profit (or added to gross loss), the resultant figure will be net profit or net loss.

The expenses which are recorded in profit and loss account are ailed ‘indirect expenses’. These be classified as follows:

Selling and distribution expenses.

These comprise of following expenses:

(a) Salesmen’s salary and commission

(b) Commission to agents

(c) Freight & carriage on sales

(d) Sales tax

(e) Bad debts

(f) Advertising

(g) Packing expenses

(h) Export duty

Administrative Expenses.

These include:

(a) Office salaries & wages

(b) Insurance

(c) Legal expenses

(d) Trade expenses

(e) Rates & taxes

(f) Audit fees

(g) Insurance

(h) Rent

(i) Printing and stationery

(j) Postage and telegrams

(k) Bank charges

Financial Expenses

These comprise:

(a) Discount allowed

(b) Interest on Capital

(c) Interest on loan

(d) Discount Charges on bill discounted

Maintenance, depreciations and Provisions etc.

These include following expenses

(a) Repairs

(b) Depreciation on assets

(c) Provision or reserve for doubtful debts

(d) Reserve for discount on debtors.

Along with above indirect expenses the debit side of profit and loss account comprises of various business losses also.

On the credit side of profit and loss account the items recorded are:

(a) Discount received

(b) Commission received

(c) Rent received

(d) Interest received

(e) Income from investments

(f) Profit on sale of assets

(g) Bad debts recovered

(h) Dividend received

(i) Apprenticeship premium etc.

The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application deveopment for business. The software are available both for intranet and internet.

Profit and Loss Account Basics

What is a profit and loss account?

The profit and loss account (p&l) is usually presented as a statement and it shows the trading activity and associated expenditure of an organisation over a defined period of time.

A typical p&l will contain the following:

Sales

This is the turnover of the business, the main source of income from sales of products or services. This figure is always net of taxes as these are payable to the government and do not form part of the income of the business.

Purchases (stock/inventory)

Purchases are the items of stock you buy in order to sell on to customers. A basic accounting principle is that income is exactly matched against the cost of generating that income. In this regard the stock or inventory on hand at the end of the accounting period is always deducted from the total purchases cost. These stock items will be used to generate future sales and will be matched against those sales in the next period.

Sales related expenditure

These costs are those that are directly incurred in the process of making a sale to a customer. They include items such as sales commission, promotional costs and courier charges.

Overheads

Lastly there are the overheads of the business. These are the costs incurred on the rest of the business that is not directly involved with the selling process. Examples of overhead costs are: admin staff salaries, lighting and heating, office stationery, computer maintenance and legal and accountancy fees.

Two versions of the profit and loss account

In published accounts the p&l account has a standard format, this is to aid understanding and interpretation of the information. The accounts are typically known as Financial (or Statutory) accounts and are subject to accounting and legal governing principles.

However, to really understand how your business is performing you need to prepare a fully detailed p&l account, this is an expanded version of the published accounts and usually has extra information such as ratio analysis and key performance indicators.

This version is typically referred to as the ‘management accounts’ simply because they are figures intended for management and not external publication. Therefore, there are no regulatory guidelines on their composition to worry about.

Management accounts are the tool you need to have in order to see if your business is profitable and are normally prepared on a regular basis, usually monthly, for each of your product lines. The p&l is a central part of the management accounts package.

Regular review is necessary because you need to be aware of areas not meeting targets as soon as possible; so that you give yourself time to take corrective action before the end of your financial year. For instance, if a regular client has started placing orders erratically it may be that on investigation, you find they are testing out one of your competitors. This gives you an opportunity to carry out some special promotions or re-negotiate the deal with your client to win their business back from your competitor.

In addition, you will find budgeting is a valuable tool for your business. A budget is a financial plan for the year ahead. Creation of a budget allows you to review all areas of your business both to ensure their existence is justified and that you are making the most of your assets or resources.

During the year you compare your actual results to your budget and investigate where results have not turned out according to plan. Examples of problems could be cost overruns due to inefficient ordering or use of more expensive components unnecessarily. Again, this review process gives you time to make changes before problem areas run out of control.