Whether the cause is natural (like a tornado or flood), accidental (like a fire), cyber (increasingly common), or the result of other human actions, businesses need to be more prepared than ever for disasters – and after concerns for safety, financial impacts are the primary consideration.
According to a 2015 Business Insider report, 1-in-4 small-to-midsize businesses won’t recover from a natural disaster, and the Federal Emergency Management Agency (FEMA) estimates that smaller businesses do far worse. And with one-third of business owners saying that they’ve been impacted by natural disasters and extreme weather events, chances are high that you could be, too.
Sufficient planning can alleviate a tremendous amount of the financial stress that disasters inflict, so take these five essential steps to financially protect your small business and you’ll be better positioned to bounce back.
Step 1: Create an emergency plan and be sure that your employees are trained on it
It’s important to be well-prepared with a written disaster plan that covers critical steps, including plans for how to deal with different types of disasters (how you react to a flood, for example, will be different than how you react to a cybersecurity breach).
Depending on your type of business, it can be advisable to plan for a longer-term shutdown that includes use of a temporary location. For example, if your retail store is unusable for several months, can you temporarily relocate it or move all products online? If so, how will you communicate this to your customers? These are the kinds of things you’ll want to consider.
Think about logistics. If phone lines are down, how will you communicate? If you’re unable to access your building(s), should employees report to work elsewhere? Include contingencies in your plan.
If you have employees, make sure they’re trained on the plans (it’s a good idea to hold drills annually), and that they understand their roles, as appropriate, ahead of time. Giving your employees responsibilities during a crisis alleviates some of the stress for you while empowering them to help bring the business back on its feet.
Step 2: Ensure you have essential insurance coverages at appropriate levels
If you’re running a business, you may already have the fundamental types of insurance that are required for your operations, like property, liability and errors and omissions insurances. However, most of these won’t cover the problems that you could incur from acts of nature, cyber breaches or other disasters.
If you’re uncertain about whether your coverage is sufficient, meet with your agent to discuss additional coverages that can help you recover. These can include loss of income coverage, repair and replacement of property beyond your current property insurance, flood insurance, and cyber breach coverage.
Carefully read the fine print in your insurance policies. Review what’s covered and what’s excluded. For example, if you have flood insurance, make sure that you understand the language of what qualifies as a flood based on which water sources are included. Are natural disasters, like tidal surges, included? What about plumbing failures?
Insurance carriers have very specific criteria; make sure you carefully read your policy and proactively ask questions. Also, bring your disaster plan, photos, receipts, and written records that can help your agent ensure your business is sufficiently covered.
Step 3: Create duplicate copies of essential records that are securely stored offsite
It’s always a good idea to have backups of digital and paper records that are critical to your business, such as financial and tax records, vendor and clients lists, and inventory records. It’s also essential to have a list of phone numbers and emails for emergency services, employees and insurers available at your home. Keep a copy in a safe place away from your home or place of business, such as with a relative who lives some distance away (in case you’re unable to access both your home and business due to the nature of the occurrence).
It’s also a good idea to have duplicate records of contact information for major clients and vendors or suppliers, as you’ll need to stay in touch with them throughout the recovery process.
Make sure financial statements (including profit and loss statements, balance sheets and tax returns) represent an accurate picture of your business’s current financial position. Why? Government disaster relief programs need this information to accurately calculate financial losses for your company. This can be achieved through a thorough understanding of your financial statements and the help of a good certified public accountant.
Step 4: Ensure that your online presence is protected
While we often think of cybercrime as an issue for huge banks and retailers, small businesses are increasingly common targets because they tend to be lax about appropriate measures to protect online information.
In fact, according to statistics compiled by Small Business Trends, nearly half of all cybercrimes occur against small businesses, and 60 percent of small businesses go out of business within six months of an attack. Why? Likely, for financial reasons – according to the same report, it costs an average of more than $1.8 million for a small business to rectify the breach and in lost operations.
How can you protect your business? The Federal Communications Commission launched a free cybersecurity planning tool, Small Biz Cyber Planner 2.0, to help businesses get started. The basics, though, include ensuring online security through day-to-day operations including requiring strong password protection on all digital equipment related to your business (many businesses follow this for desktop computers, for example, but fall short for smartphones and laptops).
Have a clear cybersecurity policy in place and ensure that your employees follow it. And use state-of-the-art software, like anti-ransomware, anti-malware software and encryption programs for sensitive information.
Step 5: Always have an emergency reserve of capital available
For many business owners, the financial implications of a disaster can be as devastating as physical damage, because they often don’t have enough funds on hand while they wait for insurance payments to come through or get back in business. If your business is unable to operate for a prolonged period (from several days to several months), what will you do? It’s recommended to have at least 1-2 months of funds reserved for business financial emergencies.
To be even more prepared, though, meet with your banker to establish a business line of credit that can be used in the event of a disaster.
If your business is still in the startup or early phase (less than two years of operations), if your credit prevents you from qualifying for a bank’s line of credit, or if you otherwise find it difficult to qualify through traditional lenders, contact us.
Proper emergency preparation is key
Disasters can strike at any moment and there’s rarely time to make sufficient preparations on the spot. Ensure that your business has financial protections in place so that if a disaster occurs, you can focus on the most important things, like safety, and rest a bit easier knowing you’re financially prepared for the road to business recovery.