Monthly Archives:' July 2015

How To Turn Risk Management Into A True Profit Center

Here is a captivating question.  How can a small or medium-sized business turn its risk management into a true profit center?

It sounds impossible – turning risk management into a profit center.  Risk management pays insurance premiums, develops workplace safety guidelines and implements loss control programs.  How could it possibly be a profit center?

Furthermore, this is not simply a question about cost containment or even cost reduction.  To succeed, the business’ risk management strategy must give the business’ owners access to more money than they would have had otherwise, including completely offsetting the cost of commercial insurance and loss control programs. Clearly, a question this challenging requires some captivating thinking.

Consider the example below of a hypothetical small manufacturing business.  This is merely an example.  The captivating risk management approach I will outline could apply to many types of profitable small and mid-size businesses in a variety of circumstances.  As the first table below illustrates, risk management is a cost center, and the business pays $210,000 in annual commercial insurance premiums and $40,000 annually is loss control and safety programs.

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It’s time for some captivating thinking.  The table below illustrates the exact same business with an Enterprise Risk Management (ERM) strategy in place.  ERM is a discipline, whereby a business assesses all the threats it faces and develops a comprehensive risk management plan.  To read more about ERM for small and mid-size businesses, CLICK HERE.

As part of its ERM approach, the business implements steps to reduce risk and mitigate risk.  Keep in mind that insurance is a financial risk mitigation approach.  As part of its ERM strategy the business owners set-up, operate and own their own insurance company, known as a Captive Insurance Company (CIC).  The CIC forms the backbone of the ERM strategy.  The CIC significantly increases the business’ insurance coverage, addressing many of the risks identified in the comprehensive risk assessment.  To read more about Captive Insurance Companies, CLICK HERE.

The CIC is owned by the business’ owners. So the owners and the business effectively retain the profits in the captive insurance company.  Because this CIC takes in annual premiums of less than $1.2 million, it can make an 831(b) tax election and be taxed at a rate of zero percent (0%) on its underwriting profit.  In the illustration below, this results in $460,600 in annual tax savings.  This assumes a combined federal and state tax rate of 47%.

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Finally, the table below illustrates how ERM with a CIC turns risk management into a true profit center that – in effect – pays the business’ owners or increases the total wealth of the owners.  The ERM Program results in $460,600 in tax savings.  The tax savings generates an estimated $13,818 in investment income (assumes 5% return and 3% after tax return).  The CIC pays $75,000 to operate, renew its actuarial pricing of policies, issue policies, renew its insurance license, conduct an annual audit and purchase reinsurance for its policies.  As we have already established, the business spends $210,000 on commercial insurance.  As part of its ERM strategy, the business is investing $40,000 in loss control and safety programs.

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As can be seen, ERM with a CIC produces a dramatic result.  This business’ risk management strategy was a drain on the business, costing it $250,000 annually.  With ERM in place, the business’ risk management program created $149,418 incremental wealth to the business owners after offsetting: the cost to operate the CIC, the cost to reinsure the CIC, the total cost of commercial insurance, and the cost of implementing a loss control program.  Captivating Thinking enables successful business owners to convert risk management from a cost center into a powerful profit center.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions.

Call us at: 1 (800) 517-0CFO 1 (800) 517-0236

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How To Significantly Grow Wealth By Starting Another Business

As a business grows and matures, its owners may look for additional means to grow revenue and boost business wealth.  A common approach is to start or acquire an additional business that serves the core business.   This is often described as vertical integration, and it is often effective because a supplier or service provider is already making a profit serving the parent company.  Also, the parent company is “staying close to home,” and usually not straying too far from its core competencies.

As an example, a manufacturer may choose to purchases or start a business within its own supply chain.  Not only does this give the manufacturer greater control of its supply chain, it also enables the manufacturer to earn additional profits.  Another benefit is that the business owner may gain better control of his or her risks, including the risk of a key supplier folding or choosing to sell to a competitor.

Clearly, this business move is not without risk.  In some cases, the manufacturer may be ill-prepared to run another company.  The owners may not understand the pitfalls that their supplier has already overcome.  Their supplier may have expertise or sourcing advantages that the manufacturer is unable to replicate.  And, choosing to compete with a supplier may embolden them to “pull out all stops” to support a business’ competitor.  A lot can go wrong.

Is There A Low Risk AND Low Effort Way To Set Up Another Profitable Business?

Actually, there is.  A successful business can turn its risk management into a separate business.  Furthermore, a well-run risk management business can function as an additional profit center.  To achieve this break-through result, the business owner implements Enterprise Risk Management (ERM) and sets up and owns an insurance company, specifically, a captive insurance company (CIC).  Captive insurance companies are a separate company, and the form the backbone or chassis of ERM for small and mid-size businesses.

Low Risk

Implementing ERM with a CIC can be a low risk endeavor because the business can choose to keep existing third party insurance coverage intact and utilize the captive to cover gaps in its existing risk profile.  ERM for small and mid-size businesses is most effective when it blends third party commercial insurance coverage with insurance coverage provided by the CIC.  In this manner, a business owner is able to enjoy a comprehensive blanket of protection.

Low Effort

Also, by working with an experienced and proven captive manager, a business does not need expertise in operating its own insurance company.  The captive manager oversees and coordinates most all of the work.  The business owner is able to own his or her own risk management business, while capable hands carry-out set up and operations on the owner’s behalf.

What Is A Captive Insurance Company?

Simply put, a captive insurance company is an insurance company.  It is a C corporation and is licensed and domiciled like any large insurance company.  Captives also have their own reserves, policies, policyholders, and claims.  Owning a captive insurance company is a sophisticated way to self-insure, and captives are generally formed to insure the risks of a business, group of businesses and related or affiliated third parties.

What Are The Benefits Of Enterprise Risk Management With A Captive Insurance Company? 

First, the parent company is able to benefit from a far more robust, holistic approach to risk management.  Specifically, the parent company or companies can now formally insure risks that may have previously been uninsured or under-insured.  The parent company can also insure deductibles where it has third party commercial insurance in place.

Second, the overall (or aggregate) wealth of one or more businesses with ERM and a CIC in place is almost always higher – significantly higher– than the overall wealth of companies without ERM and a CIC.  This occurs for two primary reasons.  First, the parent company takes an expense as it pays its insurance premium to its captive.  This lowers the parent companies taxable income.  And, the captive can make an 831(b) election and be taxed at a zero percent (0%) rate on its underwriting profits, provided the premiums it receives are less than $1.2 million annually.  Second, the captive is able to earn a return on its reserve pool (or assets).  And, the captive’s asset pool has been amassed with pre-tax dollars, enabling asset growth on a larger starting base.

How Can Starting Another Business Significantly Grow Wealth? 

Adverse events are going to occur whether or not a business has ERM in place.  Businesses with a captive have a much larger pool of funds to address adverse events (typically 80% to 100% more) because captive assets are comprised of pre-tax dollars.  Hence, the captive effectively acts as a legal tax shelter for the premiums received from its insured.

Premiums are paid from the parent company to the captive with pre-tax dollars, and accumulate tax-free as reserves of the captive (up to $1.2 million annually).  Captive reserves can be translated into virtually any other type of asset (some domiciles have restrictions).  Hence premiums paid to the captive are in effect a “transfer of wealth” and are protected from the parent company’s creditors and lawsuits.  For this reason (tax savings and reserve accumulation), ERM with a CIC is quite often a successful and profitable “second business.”  Over time, ERM with a well- structured captive can often double the wealth accumulation of its owners.


My Professional CFO, LLC, is a Business Management firm providing the highest level of service in three key areas of importance to Independent Contractor Physicians, Attorneys and Information Technology Professionals. We specialize in Corporation and LLC filings and ongoing Compliance, Accounting and Payroll, and Investment Management. Our professionals will assist you in forming the appropriate type of company for your situation and work with you to make sure your company remains compliant. We provide ongoing Accounting and Payroll services to make certain all bills are paid and necessary tax forms and withholding payments are made in a timely manner, as well as the set up and management of your retirement accounts. We are not simply a document filing service, we are here to help you with the part of the business that you have to do, so you can focus on what you love to do. For more information visit our website www.myprofessionalcfo.com

Alan Conner, MBA – President of My Professional CFO, LLC has nearly 2 decades of experience working with professionals and small business during both the start-up and ongoing management. He has written countless business plans and has managed assets for both institutions and high net worth clients.

Email us with any questions

Call us at: 1 (800) 517-0CFO 1 (800) 517-0236

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