PREPARING YOUR BUSINESS FOR THE ‘BIG ONE’ 

When the earthquake rattled Seattle in late February this year, it caught many small-business owners without earthquake insurance or a disaster-recovery plan. Many small businesses around the country are not prepared to financially recover from a similar disaster.

That unpreparedness is a major reason why 40 percent of all businesses hit by a natural disaster fail to reopen, and another 25 percent that reopen close within a year, according to the Federal Emergency Management Agency. [Journal, Feb 2001, p. 66]Such a high failure rate is not surprising, say experts. Many small businesses operate on thin margins as it is, and any major disruption in cash flow is often fatal. Businesses that reopen often are crippled by staff turnover, increased debt, or, in the event of a widespread disaster, a regional economic downturn that affects suppliers and customers.

While a small business cannot prevent Mother Nature from striking, it can prepare financially for such a catastrophe. Here are some steps to take.

Assess the potential risks. Some businesses need only rented office space and a few phones to be up and running, while others depend heavily on their existing structure and production facilities. What would happen to your employees, customers, suppliers and distributors in the event of a disaster? Analyze what types of natural disasters you face, and what impact different disasters might have on your ability to continue operations and maintain market share. What inventory is at risk, and is it insured?

Prepare a plan. Prepare a disaster recovery plan before a calamity hits. Prepare an evacuation plan for your employees and customers, and train staff to execute that plan. Identify the activities and resources critical to resuming operation. Prepare a list of skeleton staff. Identify alternate locations, equipment, supplies and suppliers you could use. Talk with current suppliers and customers to see whether they also are prepared for a natural disaster. Prepare a list, kept offsite, of key people to contact, including disaster-relief agencies, clients, suppliers, and insurance companies. Keep insurance policies offsite, and keep emergency cash reserves somewhere that won’t be affected by a local disaster (the bank next door could close down along with you).

Reduce risks. Damage from a disaster often can be minimized or even prevented. Have an insurance company assess the potential for disasters, including fire and vandalism, and update this assessment annually. Modernizing or building to the latest building codes could minimize damage. You also can minimize damage by setting up alternate power sources or storing duplicate business records and client lists offsite. Back up computer data daily and store it (along with the two most recent previous backups) offsite. Depending on your business, computer backup alone could mean the difference between being able to reopen almost immediately in a different location or never reopening again.

Insure against risk. You undoubtedly carry property/casualty insurance, but you’ll need more than that. First, be sure the property/casualty coverage is up to date to reflect building improvements or additional property. Annually review all your insurance with your agent or financial advisor. Will the coverage rebuild or repair according to higher building codes? Will the policy cover replacement costs at current prices, or only at a set limit or depreciated value? You need to buy special coverage for earthquakes and floods. They aren’t covered under standard policies.

Do you need inventory coverage? A CERTIFIED FINANCIAL PLANNER™ professional recalls a client who turned down his recommendation to insure his produce inventory and subsequently lost hundreds of thousands of dollars in a hurricane. Business-interruption insurance covers lost income and overhead expenses when a business must temporarily close its doors due to a disaster (including the owner’s disability). Check for special riders and compare policies for your special needs. One insurance company paid a fire-ravaged health club for income lost during rebuilding, but not for the hundreds of thousands of dollars in prepaid membership fees the club had to refund.[Business Week article in business file]

Be familiar with natural disaster resources. Did you know that the IRS allows business owners to amend their previous year’s taxes to claim disaster-related casualty losses if the president declares a disaster?[Journal, Feb 2001, p. 64] That can put much needed cash in your pocket. The Small Business Administration may be able to provide low-interest loans, and your state or local Economic Development Agency may be able to help. Identify these organizations ahead of time.

April 2001— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co. LLP, a local member in good standing of the FPA.