One in every 10 small businesses in the UK has suffered from a major business disruption at some point in the past two years, according to new research.

Figures published by insurer Direct Line for Business show that more than half a million small firms have been forced to stop trading at some point since mid-2014 as a result of external issues ranging from damaged stock to broken down machinery.

The study suggests that the typical cost of disruption that lasts for a fortnight is just under £9,000. And around 20% of companies say that, if they were forced to put sales on hold as the result of an unforeseen event, they would only be able to stay in business for a month.

The average firm, however, was found to have sufficient cash held in reserve to remain afloat for just over eight months, even if no new revenues were being generated.

Interestingly, the report found that sole traders expected to be able to survive for more than nine months without making fresh sales. Businesses that employ between 10 and 50 people reported, however, that they would only be able to stay solvent for six months with no new revenues – an indication of the pressure that staffing costs can put on struggling companies.

Consequences of business disruption

One particularly worrying finding from the survey was that, when disruption occurred, it typically resulted in a business having to shut down for three months. Among those companies that reported some form of disruption in the past two years, almost half (48%) said it led to a loss in profit while 42% said it resulted in lower revenues.

Four in 10 (39%) said the issues caused them to lose customers, while a third of business owners were forced to pump some of their own cash into their firms in order to stay afloat. Only one in every six firms (16%) said they were forced to make layoffs, while 6% of disrupted businesses went to the wall.

Official figures suggest that almost 60% of new firms do not survive beyond their first five years, with cashflow problems widely recognised as the most common reason for a business to go under. However, a lack of cash can be the result of a number of factors, ranging from overspending on marketing or stock to being disrupted by events like staff sickness, technology failure, or fraud.

Business insurance

While growing firms may be keen to keep extra or optional expenses to a minimum, failure to take out some form of protection such as business disruption insurance could prove to be a false economy if the company faces an unforeseen problem that affects its ability to trade normally.

Rob Starr, CEO of Crunch Insurance, had this advice:

“One way a small company can protect itself against those unforeseen financial bumps is to make sure they have the correct insurance in place. This may not solve every problem, for instance a drop in sales due to market conditions, but for an insurable incident that causes you to close your business for a period, business interruption cover could be the lifeline you need.

“Business interruption cover is there to protect the business owner rather than the customer and is relatively low in premium considering it could save your business.”
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