Running a business, no matter its size, is inherently risky. From potential legal claims to unexpected equipment failures or workplace injuries, the spectrum of risks that small business owners face is broad and complex. Being proactive about identifying and Finance risk management is not just good business sense—it could be critical for survival.
In this blog, we explore the two broad categories of business risk, highlight three major types of insurance every small business should consider, and explain why insurance is both a legal and strategic necessity.
Two Broad Categories of Business Finance Risk Management
The range of risks that may arise as a result of being in business can be considered in two broad categories:
1. Common Business Risks
These are the risks that almost every business, regardless of its industry or size, will face. This includes liability for accidents, workplace injuries, damage to assets, and legal compliance issues.
2. Business-Specific Risks
These are unique to your business model, operations, or industry. For instance, a café may face health and safety risks related to food preparation, whereas an IT consultancy may be more vulnerable to cyberattacks or data breaches.
No matter whether you operate as a sole trader, a partnership, or a proprietary limited (Pty Ltd) company, understanding and mitigating these risks is essential.
Insurance: A Legal Obligation or Strategic Choice?
In some cases, holding insurance is legally mandatory, while in others, it’s up to the business owner to weigh the potential risks and choose to either insure against finance risk management themselves.
Let’s delve into the three key areas of business insurance that all self-employed individuals and small businesses should be aware of:
1.Public liability;
2.Workers’ compensation; and
3.Business risk.
Public Liability
As the name suggests, public liability relates to claims resulting from events that occur as a result of your business activities and which cause injuries to people or damage to property outside your business. This could happen if you are working in public places, at premises other than your own, or you have visitors coming to your place of business.It may also cover loss or damage of goods in your care but that you do not own.
Holding public liability insurance is generally not compulsory but the financial costs to a business should someone die or suffer serious injury as a result of your business activities could be catastrophic.
In some cases, public liability insurance is compulsory (such as electricians in Queensland and plumbers in Victoria) so check with your trade or business association for rules that may be specific to your profession and state. In many instances, it will be necessary to hold this cover if you are working on contract.
Workers’ Compensation
Workers’ Compensation is a compulsory (legally required) insurance for all employers in Australia. It provides protection for employees if they suffer a work-related injury or disease.
You must have workers’ compensation insurance to cover all workers. This includes if your business hires workers on a full-time, part-time or casual basis under a written or oral contract of service or apprenticeship.
Each state/territory operates their own scheme. Your insurance broker can advise you regarding this, or you can check it out yourself by visiting the workers’ compensation website in your state.
Business Insurance
Every business is unique and you must consider the range of risks specific to your business and industry. For specific industry issues, you should contact your association or professional body. There are some risks, however, that are likely to be common to all small businesses. We focus here specifically on those that you can insure against. As with most insurable risks, you must make a conscious decision if you are going to accept and
do finance risk management by yourself, or if you want to protect your business via insurance.
Business risk can be broadly considered in two groups:
• Physical risk to business property; and
• Business activity related risks.
Business property includes things like:
• Business assets such as motor vehicles (see our section on property insurance);
• Goods in transit;
• Buildings and contents; and
• Stock.
Risks to physical property include:
• Theft/burglary; and
• Equipment failure.
Activity-related risks include things like:
• Goods in transit (damage, theft).
Insurance for business activities can include the following coverage.
• Management and legal liability – can cover you, your directors, officers and employees, if you are
sued or legal claims are made against you.
The range of events covered will differ depending on the policy but it can cover things like:
• Business crisis, such as loss of a large contract or a product recall;
• Employee wrongful acts like wrongful dismissal or harassment;
• Loss of money or property due to fraudulent acts by an employee;
• Costs associated with a tax audit; and/or
• Cyber risks such as loss of data or a cyber attack.
Types of Payouts from Business Insurance
Depending on the nature of the incident and the type of coverage, insurance payments can take two main forms:
Lump-sum Payments
Used to cover direct costs of an incident (e.g., stolen goods, damaged equipment, legal fees).
Regular Ongoing Payments
Provided when the business is temporarily unable to operate at full capacity (e.g., after a fire or cyberattack), but must still pay rent, wages, and other fixed expenses.
Final Thoughts:
Insurance as a Smart Business Strategy
Insurance isn’t just about ticking a legal box—it’s a smart, proactive strategy to protect the time, money, and effort you’ve invested in building your business.
While some forms of cover are legally required, others are optional but critical for long-term sustainability. Every small business owner should:
- Identify the common and specific risks they face
- Determine which risks can be insured
- Decide whether to self-manage or insure those risks
- Regularly review and update insurance policies as the business grows
By doing so, you not only ensure legal compliance but also fortify your business against the unexpected.
Need Help Choosing the Right Insurance?
Speak with a licensed insurance advisor or broker who understands your industry and can help tailor a policy to suit your needs.