For small business owners and self-employed workers, cash flow is everything. It drives major decisions, ranging from what types of projects/clients to take on and how to pay employees. Unfortunately, a lack of cash flow is a common challenge among small business owners, with an average of 69% of small business owners reporting that they have lost sleep specifically over cash flow concerns.
By having a better understanding of the cash flow situation among small businesses and how making smaller, regulated workers compensation payments can improve cash flow, businesses and insurance companies alike can benefit.
When you consider the fact that the average small business in the United States carries more than $53,000 in receivables at any given time, it’s easy to see how cash flow can be a concern. Most small businesses also invoice rather than bill in advance, leaving a large gap between when a product/service is rendered to a client and when the business actually receives payment for it.
These problems are compounded by the fact that, once payments are made, the time it takes to process payments and have them deposited into the correct accounts can drag out cash flow issues even further. As a result, many small business owners find themselves struggling to pay their employees or may even have to forego certain projects—losing out on potential income due to cash flow concerns.
Many insurance companies that offer coverage (including workers compensation coverage) to small businesses require business owners to make a down payment with the remainder paid monthly or quarterly. Typically, the amount charged for workers compensation is estimated based on payroll from the previous year.
Unfortunately, this type of billing can make cash flow problems even worse for small businesses. That’s because as businesses grow, so does their payroll—and basing workers’ compensation payments on last year’s payroll often means business owners could be underpaying. By the time their policy period ends, and they need to “settle up” with the insurance company, they may find themselves having to pay a substantial bill. And when cash flow is already a problem, coming up with the money to cover that bill may not be easy. And if they paid too much, this puts more pressure on a small business that could have put that cash to work during the policy year.
In recent years, more insurance companies have begun offering pay-as-you-go billing to small business customers. With this billing option, small businesses can make smaller payments more often to coincide with their payroll processing, such as weekly, bi-weekly, or semi-monthly. Furthermore, premiums are calculated based on actual current payroll rather than last year’s numbers. The end result is that small business owners are able to make payments that reflect the ongoing reality of their business and avoid being faced with the potential of a large premium audit bill at the end of the policy period.
Insurance companies also benefit because they receive payments in a timely manner that are calculated to more accurately reflect the policyholder’s business circumstances. As a result, they’re also less likely to need to chase down audit bills at the end of a policy period. It’s a win-win situation for both sides!
When it comes to small business cash flow, pay-as-you-go insurance billing is a very valuable tool. For insurance companies interested in offering this type of billing to customers, the use of payroll-based premium calculation and collection software makes it possible. The InsurePay Pay-as-you-go solution, gives business owners added convenience and improved cash flow while avoiding audit surprises. Meanwhile, insurance companies improve their own cash flow and avoid chasing additional policy payments down the road. Find out more about InsurePay’s platform by contacting us today!