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Registering, licenses and insurance

What registration, licenses and insurance are each for, what they add to the fixed costs and to break-even, and when cover is worth more than the average loss it pays.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will turn the yearly cost of registering, licenses and insurance into a monthly fixed cost and into the extra sales it needs. You will also find the average yearly loss a cover pays and decide whether the cover is worth buying by asking whether one loss could be paid from reserves.

2. What you already have

You can find break-even by dividing the fixed costs by what one sale contributes, and you know from the last lesson that the legal form decides who pays when a business cannot. This lesson prices the things a business needs before its first sale, whatever its form: being on the right registers, holding the right licenses, and being covered for what could go wrong. Each one is a fixed cost, so each one is a number of sales the month has to make first, and insurance adds one new question the break-even arithmetic cannot answer on its own: whether the cover is worth more than it costs.

3. Words this lesson uses

4. Three kinds of paperwork, each a fixed cost, and one test for cover

Before the first sale, most businesses need some of three things. They answer different questions and are easy to confuse.

Registration tells the authorities the business exists. Depending on the form and the place, that can mean a company register, a register of business names, and a tax registration so the profit is taxed and any sales tax is collected.

Licenses and permits are permission to do a particular thing: sell food, trade in the street, sell alcohol, drive a taxi, fit gas appliances, look after children. They depend on the activity, not on the legal form.

Insurance pays when something goes wrong: a customer hurt, a client's property damaged, stock stolen, a van crashed. Some cover is required by law in many places — vehicle cover, and cover for injury to employees — and the rest is a choice.

All three are paid whatever the volume, so all three are fixed costs. A yearly fee becomes a monthly one by dividing by twelve, and a monthly fixed cost becomes sales by dividing by the contribution per sale:

$$\text{extra sales a month} = \frac{\text{yearly cost} \div 12}{\text{contribution per sale}}$$

Insurance needs one more test. A premium almost always costs more than the average loss it pays, because the insurer has costs and needs a profit. So the average never justifies cover on its own. Cover is worth buying when one loss would be more than the business could pay from its own reserves — when the choice is between a small certain cost now and a rare bill that would close it.

Taxes, permits, registration and the records a business must keep are set where the business trades, and they differ from one place to the next and from one year to the next. So this teaches the reasoning — what a figure is for, and how to work it out — with any rate or threshold given to you in the question as a number to use. The rate that applies to you is a thing to look up with the authority where you trade, and to check again each year.

5. The method, step by step, and how to check it

Find out what applies before you spend. The authority where the business will trade publishes what an activity needs; the city or county, the tax authority and a trade body for the activity are the usual places to ask. Write each requirement down with its cost, what it is for, and when it must be renewed.

Put every cost on the same footing. Some are paid once, some yearly, some monthly. Turn each into a monthly figure: a yearly fee over twelve; a one-off setup fee over the months you expect it to serve, or simply noted as a start-up cost to be paid from savings.

Add them to the fixed costs, and redo break-even. The monthly total over the contribution per sale is the extra sales needed. Divide by the trading days for a daily figure the owner can check.

For each optional cover, compare three figures. The premium; the average yearly loss, which is one loss divided by the years between losses; and the business's reserve. Take the average from the premium to see what the cover costs above the losses it pays.

Check the arithmetic by multiplying back: the extra sales a month times the contribution per sale, times twelve, should give the yearly total you started from. Check the judgment by reading the list against the activity: a van without vehicle cover, or a kitchen with no food registration, is a missing line, not a saving.

6. Reading an insurance quote

A quote gives more than a price. The limit is the most the insurer will pay for one claim; cover for injury to the public is often quoted in millions because that is what a serious injury can cost. The excess is the first part of any claim, which the business pays itself: a 250 excess means a 200 loss is not worth claiming at all, and a 5,000 loss costs the business 250. The exclusions say what is not covered, and are the part most often unread until a claim is refused.

A higher excess lowers the premium. That trade is worth making when the business could comfortably pay the excess several times a year from its reserve, because it keeps the insurance for the large losses it is really for. It is a poor trade when one excess would strain the month's cash.

Comparing two quotes works only on the same terms: the same limit, a similar excess and the same exclusions. A cheaper quote with a limit a tenth of the size, or an exclusion for the very activity the business does, is not cheaper cover; it is less of it.

7. Costs that are fixed, and dates that are fixed too

Fixed does not mean permanent and it does not mean unavoidable. It means the number does not move when the volume moves, inside the range the business is actually trading in. Rent is fixed this year and negotiable next year, and that is still fixed for the purpose of asking what one more sale costs.

Compliance costs come with dates as well as amounts. A license that expires in March, cover that renews in June, a tax return due after the year ends: each is a payment the cash forecast must hold, and a lapse can be far more expensive than the fee. Trading on an expired street license can mean losing the pitch; driving an uninsured van can mean a fine and a claim the business pays in full.

The habit that prevents this is a one-page compliance calendar: every registration, license and cover, its renewal date, its cost, and a reminder a month before. Put the payments into the cash forecast in the months they fall, not spread evenly, because a 720 license paid in one month is 720 that month, even though it is 60 a month for pricing.

Keep the documents with the calendar. An inspector, a landlord or a new client may ask to see a license or a certificate of cover, and being able to show it at once is part of looking like a business people can trust.

8. In the world: a home baker going to market

A home baker has sold cakes to friends for a year and wants a Saturday stall at the town market. Before she can, she needs her kitchen registered for food with the local authority (free where she lives, but it brings an inspection), a market pitch license at 35 a week, public liability cover — the market insists on it — at 180 a year, and a tax registration now that she is trading regularly.

She prices it. The pitch is 35 × 52 = 1,820 a year, and with the cover the total is 2,000 a year, or about 167 a month. Her cakes contribute about 9 each after ingredients, boxes and card fees, so compliance and the pitch need 167 ÷ 9 ≈ 19 cakes a month — about five a Saturday. She sells around thirty on a good Saturday, so the stall comfortably carries it.

She also asks whether to add product cover in case a cake makes someone ill. The broker quotes 150 a year more. Illness from a home kitchen is rare, but a single claim could run to thousands, and her savings are about 1,500. On the average the cover costs more than it pays; on the question that matters — could she pay one claim herself? — the answer is no. She buys it, and adds 150 ÷ 12 ÷ 9 ≈ 1.4 cakes a month to her break-even.

Last, she writes the renewal dates on one page: the license each quarter, the cover each April, the tax return after the year ends.

9. In the world: why insurers charge more than the average

An insurer pools many small premiums to pay the few large claims. Its premiums must cover the average claim, its own staff and offices, the cost of selling policies, and a profit. That is why, across all its customers, premiums exceed claims. Buying cover is paying a known amount to swap a small chance of a ruinous bill for a certain small one, which is why the test is survival, not the average.

10. Where this goes wrong

Leaving compliance out of the price. A license is as much a cost of each sale as the cup is; leave it out and every price is slightly too low.

Judging cover on the average loss. Nearly all insurance costs more than the average it pays. The question is whether one loss could be survived without it.

Comparing a premium with one whole loss. A premium of 400 against a loss of 20,000 looks like a bargain, but if that loss happens once in a century the cover costs far more than it pays.

Treating a license as a matter of the legal form. A company and a sole proprietor selling the same food need the same food license.

Spreading a yearly payment in the cash forecast. For pricing it is a twelfth a month; in the cash forecast it is paid in the month it falls due.

11. A coffee cart's list, as cups a day

1. Add the yearly costs: registration 60, license 720, cover 900.

   $60 + 720 + 900 = 1680$

   Every one is paid whatever the number of cups.

2. Spread the total over twelve months.

   $1680 \div 12 = 140$

   The monthly share of the year's compliance.

3. Divide by one cup's contribution of 3.50.

   $140 \div 3.50 = 40$

   Forty cups a month before anything else is paid.

4. Divide by twenty trading days.

   $40 \div 20 = 2$

   Two cups a day pays for being allowed to trade and being covered.

5. Check by multiplying back.

   $2 \times 20 \times 3.50 \times 12 = 1680$

   The daily figure rebuilds the yearly total, so the division is right.

12. Whether a plumber should insure his tools

1. Note the loss: a van break-in taking the tools, about 6,000.

   $6000$

   The size of one loss.

2. Note how often: about once in ten years.

   $6000 \div 10 = 600$

   The average yearly loss.

3. Compare with the premium of 780.

   $780 - 600 = 180$

   The cover costs 180 a year above the losses it pays, on average.

4. Take off the excess he would still pay, 250.

   $6000 - 250 = 5750 \text{ paid by the insurer}$

   The excess is his whatever happens.

5. Compare one loss with his reserve of 2,000.

   $6000 > 2000$

   He could not replace the tools from savings, and could not work without them.

6. Decide on the test, not the average.

   $\text{worth buying: one loss would stop the business}$

   180 a year is the price of not losing weeks of work.

13. A stall's break-even with its license and cover

1. Start from the fixed costs before compliance.

   $1100 \text{ a month}$

   Pitch fee, phone and the rest.

2. Add the yearly license and cover.

   $960 + 480 = 1440$

   Both are fixed costs paid once a year.

3. Spread them over the months.

   $1440 \div 12 = 120$

   The month's share.

4. Find the whole monthly fixed cost.

   $1100 + 120 = 1220$

   What the month's sales must cover first.

5. Divide by a contribution of 5 a sale.

   $1220 \div 5 = 244$

   Break-even with compliance counted.

6. Compare with break-even without it.

   $1100 \div 5 = 220; \quad 244 - 220 = 24$

   Compliance costs twenty-four sales a month.

7. Put the payments in the cash forecast where they fall.

   $\text{license } 960 \text{ in March}; \quad \text{cover } 480 \text{ in June}$

   For pricing they are 120 a month; for cash they arrive in two lumps.

14. Your turn: a license of 540 and cover of 420 a year, at 4 a sale

1. Add the yearly costs.

   $540 + 420 = 960$

   Both fixed.

2. Spread them over twelve months.

   $960 \div 12 = 80$

   The monthly share.

3. Your turn: work this step out. Its working is at the end of the packet.

   Divide by the contribution per sale.

15. Guided practice

A new food van needs four things sorted before it opens. Match each need to what deals with it.

16. Guided practice

Complete the worked solution: a food van pays $360$ dollars a year for its street-trading license and $1176$ dollars a year for insurance. Each meal contributes $8$ dollars. How many extra meals a month do the two costs need?

1. Add the two yearly costs.

   $360 + 1176 =$ _t

   Both are paid whatever the number of meals.

2. Spread the total over the months.

   $(\text{yearly total}) \div 12 =$ _m

   A yearly cost belongs to every month of the year.

3. Divide by the contribution per meal.

   $(\text{monthly cost}) \div 8 =$ _n

   It turns a cost into the sales that pay for it.

4. Say what kind of cost it is.

   $\text{fixed: it does not move with the number of meals}$

   So it belongs with the rent, not with the ingredients.

5. Say what it does to break-even.

   $\text{break-even rises by the same number of meals}$

   Every fixed cost is a number of sales the month must make first.

17. Guided practice

A cleaning business can insure against damaging a client's property. Its owner reckons a claim would cost about $14350$ dollars and would happen about once in $35$ years. The cover costs $480$ dollars a year. On average, how many dollars a year more does the cover cost than the losses it would pay?

Answer:

18. Practice

A small removals business has $5000$ dollars in reserve. Dropping a client's piano could cost $27000$ dollars, and the cover for it costs more each year than such accidents cost on average. When is buying that cover the sound decision?

• When one loss would be more than the business could pay from its own reserves
• Whenever the premium is smaller than the loss it covers
• Only when an accident is expected in the coming year
• Never, because it costs more than it pays out on average

19. Practice

A market stall's fixed costs are $895$ dollars a month before its pitch license and insurance, which cost $588$ dollars a year together. Each sale contributes $8$ dollars. How many sales a month does the stall need to break even once the license and insurance are counted?

Answer:

20. Practice

Tomas runs a coffee cart. His street-trading license costs $1176$ dollars a year and his insurance $5736$ dollars a year. Each cup contributes $6$ dollars, and he trades $24$ days a month. Fill in what the two cost him, in cups.

21. Somewhere new

Kofi walks dogs and makes about $800$ dollars profit a month. If a dog in his care were hurt, a claim could cost around $9600$ dollars; he reckons that would happen about once in $5$ years. Cover costs $2120$ dollars a year. Fill in the sheet.

22. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

23. Test question

Tomas runs a coffee cart. His street-trading license costs $1200$ dollars a year and his insurance $3552$ dollars a year. Each cup contributes $6$ dollars, and he trades $22$ days a month. Fill in what the two cost him, in cups.

24. What you can do now

You can price the paperwork a business needs before it trades, as dollars a month and as sales a day, and judge a cover on the loss it prevents rather than on its average. Tell someone why insurance that costs more than it pays out on average can still be the right thing to buy. Next: keeping the business's money apart from your own.

Working for the steps left to you

14. Your turn: a license of 540 and cover of 420 a year, at 4 a sale, step 3