What is profit protection?
The easiest way to explain the meaning of profit protection is with a hypothetical example.
Alan Taylor is the Managing Director of a private limited company. The company is recognised as one of the foremost design agencies in Scotland. Sales revenues are increasing and much of this is down to the tireless enthusiasm of Donald Sime, the Sales Director. His skills have meant many accounts have been snatched away from larger established agencies. Indeed, his most recent successful pitch has netted a contract that will guarantee expansion for the next five years.
Alan is confident that, with the help of recently agreed finance from a bank, the company can look forward to a rewarding and profitable future.
Then everything changed, Alan was greeted with the tragic news Donald had been killed in a traffic accident. After the initial shock, Alan’s thoughts turned to Donald’s family. How must they be feeling? Will they be okay financially?
But then he began to think about the implications of Donald’s death on the future of the business. What if an important contract is now in danger without Donald’s expertise and enthusiasm to manage the account? To many people Donald is the company - will his death mean loss of sales and loss of new accounts? Loss of sales will have a detrimental effect on cash flow, profits and turnover. What happens if the bank loses confidence in the company and decides to call in the recent loan?
Donald was a key employee. Alan has to face the reality that Donald’s death could also be the death of the business.
A cash injection from a life assurance product on Donald’s life could replace lost revenue, pay off outstanding loans, or even cover the cost of recruiting a replacement. Most importantly, it could give Alan’s company the financial breathing space it needs to reassess its strategy and refocus its remaining resources. Any cover should be placed in the correct trust to ensure payment is made correctly and tax efficiently.
