Can Your Small Business Survive Disaster?

Memorial Day weekend served up numerous reminders of the vulnerability of small businesses to disasters. Boardwalk vendors were reopening on the Jersey Shore and Coney Island. San Antonio was underwater, and a large portion of Moore, Oklahoma was swept away by tornados.

Only about 35% of small (under 100 employees) businesses have insurance for interruption of business income. Most carry property and casualty insurance, which will pay for repairs and some ongoing expenses while you are closed, but there are many other ways to be impacted.

A motorcycle repair shop in New Jersey was undamaged by Superstorm Sandy, but with impassable roads and thousands of his customers dealing with lost homes (and lost motorcycles) his business was essentially shut down.

A fire in a local office building caused heavy smoke and water damage. The professionals who owned firms in the building had to be restrained by police from running in to save their records.

post sandy businessesOnly about 25% of small businesses that lose their records to disaster survive. Keeping backups off site and testing them are a requirement for any business, but there are so many other ways for a small business to suffer.

In the office building fire above, a financial management firm had complete backups and redundant offsite capabilities. They were functioning the next day, working remotely to issue month end statements, pay bills and reallocate client assets.

Unfortunately, battles between insurance companies and contractors kept them from moving back in for months. Their culture suffered from lack of communication. Potential clients didn’t want to meet in a planner’s house or restaurant to discuss their confidential finances. Business suffered, but not in any way that was insurable.

Planning for an interruption in business is straightforward. Redundant records and cash reserves need to be in place, but alternative sources of supply and temporary space are decisions that you can make on the fly. For many small businesses however, the biggest threat has nothing to do with the disasters; it is the incapacitation of the owner.

How well could your business function without you? If you were in an accident, or needed surgery, do you have a contingency plan that allows your business to survive for weeks or months in your absence?

If you are a Baby Boomer, don’t be surprised if your bank asks you for such a plan at the next credit line renewal. Bankers can read risk reports as well as any health insurance company. Older folks pay higher health premiums because they are at greater risk. Age is starting to impact lenders’ attitudes towards extending credit as well.

You should have two plans prepared. The first is for planned or unplanned absences of two weeks or less. That plan is driven by assignments of your responsibilities. Who signs checks? (And just as important, who checks the signer?) Who handles your daily functions? Which of those tasks can be left undone for two weeks, and which ones can’t?

The plan for more than two weeks incapacity is focused on decision making. Who determines courses of action for which you hold the liability? Who has the final say on hiring and firing? Who grants or refuses a concession to a major customer?

If you are fortunate enough to have a solid second-in-command (SIC) you are ahead of the game, but is he or she  able to take in the entire scope of what you would consider when making a decision? Sometimes financial executives can’t see beyond the profit margin, or sales managers can’t see beyond the transaction. In those scenarios, I often recommend shared decision making.

I once worked with a manufacturer who took extended trips into areas where he was unreachable. He left decision making jointly to his sales manager and plant manager. If the two couldn’t agree, the CFO could make whatever decision he wanted. It worked for years. The two managers disliked the CFO, so they would always work out a compromise rather than hand him the authority.

When considering your disaster readiness, don’t forget to include yourself in the plan.

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