A key person is any employee whose death or continued absence from work would have an effect on the profits. Would you classify yourself as a key person?
Key people are individuals whose knowledge, skills, leadership or experience are important the financial success of your business. A few examples may include, but aren't limited to:
- Director (Managing, Commercial, Sales, Finance)
- IT Specialist
- Technicians and R&D Personnel
- Head of Product Development
- You
If you've read the box above you'll know which people are key in your business. Take a moment to consider the following as you picture your business and those employees:
- What specialist skills/knowledge do you or other key staff have?
- Could anyone else do their work?
- Would the business need to recruit and train a replacement?
- How long would the business survive without a replacement?
- How quickly would the business need more money?
- What impact would this have on the business financially?
- Could the company recover without an injection of funds to replace the loss of profits?
Without appropriate Key Person Cover in place, the following consequences could happen:
- Business suffers a significant loss of profits
- Increased drain on business funds and time
- Loss of important business contacts
- Loss of specific knowledge of the business's systems and processes
- Costs and time incurred to find a replacement
- Costs and time drained to train a replacement
- Business reputation - potential loss of confidence for both staff and clients
- Staff start looking for other jobs
- Competitors pounce on your weakened position
- Reduced cash flow may mean loans/overdraft can't be serviced - creditors could demand immediate repayment of any debts in full
However, Key Person Cover provides an ideal solution so that you can:
- Replace lost profits
- Avoid any cash flow issues
- Repay any outstanding loans/debts
- Recruit a replacement on either a temporary or permanent basis
- Train other employees to take over the key person's role
The reality is that a loan may not even be an option. Consider the timing - your business has just lost one of its key people.
- If you were the bank manager lending the cash, how much confidence would you have in the business?
- What personal security might apply to any borrowing? The bank may require your personal assets as security, such as your home, which could also put your dependants at risk.
- How would your business' credit rating be affected if an owner or key person has been lost? Considering they play a key role in the profits and performance of the company.
- Who knows what the market conditions will be at the time and what the lending policies will be?
These questions needn't be asked when you have Key Person Cover in place.
You are far more likely to suffer a serious illness than you are to pass away - fact. The financial situation is often worse than the event of death.
If the key person suffers, for example, a severe heart attack, it is likely that they won't return to work for quite some time, if at all. However, they might still expect to get financial support from your business without being able to contribute to the running or profitability of it.
You may have to pay two salaries for one role should you need to recruit and train a temporary replacement.
