How Small Business Should Prepare for an Emergency
Small businesses can be exposed to a number of risks, from fraud and loss of key employees to cyber-attacks, all of which can trigger major financial difficulty. As much as 5% of an organization’s yearly income is lost to fraud, and small businesses are particularly susceptible. However, small businesses can be more resilient if owners follow these steps.
Developing a plan is most often neglected when times are good, and business is thriving. Unfortunately, it does not take much to potentially cripple a business’ operation. One cyberattack that collapses the server, a natural disaster or a false invoice can turn a small business upside down. These scenarios can all be prevented by taking proactive steps to control your business’s exposure to particular dangers.
To create a contingency plan for your business, follow this 5-step outline:
1. Identify/prioritize resources
Start by naming all company resources you cannot live without, such as employees, IT systems, major customers and physical assets.
2. Pinpoint the key risks
Pinpoint the possible threats to those important resources above. If necessary, you can hire a consultant who specializes in identifying risks.
3. Draft the plan
Write a contingency plan for every identified risk. What if you lose your key employee due to death or resignation? What if you lose access to the office due to damage? It is best to begin with the top priority threats, usually those that are most likely to occur and would have the biggest impact. As you draft the plan, ask yourself what steps would have to be taken to resume normal operations. This is the most important part of the plan, and you must create a step-by-step plan for each risk.
4. Distribute the plan
Make sure every employee and stakeholder has easy access to the plan. Distribute it to them before a crisis happens and stick to it when an emergency occurs.
5. Maintain the plan
Ensure the plan is updated with any change in your business, such as hiring and firing or the use of a new technology.
Owners can mitigate risk with business interruption insurance, which protects the loss of income that your business suffers after a disruption and helps get the business up and running again in the shortest time possible.
You are probably wondering, what is the difference between this and property insurance? Property insurance only covers physical damage to the organization, while business interruption covers the profits that would have been earned. This extra policy stipulation is applicable to all forms of businesses, as it is intended to put a business in the same financial position it would have been in if no loss had happened.
Below are what is typically covered under business interruption insurance:
• Fixed cost – operational expenses and other costs (based on historical costs)
• Extra expenses – reimbursement for reasonable expenses (beyond the fixed costs) that allow business to continue operation
• Temporary location – some policies cover the extra expenses for moving to, and operating from, a temporary location
• Profits – profits that would have been earned (based on prior months’ financial statements)
It’s important to speak with your accountant about the financial impact of an interruption to your business, and fully understand coverage options with the help of your insurer.
While we all hope that disaster recovery planning is an easy process, in reality it takes time and consideration. The main purpose of your recovery plan is to ensure business continuity, diminish data loss, and maximize productivity in the midst of a crisis, either a disaster or a cyber-attack. In other words, to keep the business safe after trouble strikes. Below are some key elements of a business recovery plan:
• Communications strategy – to help prevent the loss of customers, post notices outside your premises, call or send your customers/clients an email to notify the status of your business.
• Check on your employees’ personal safety – if it is a natural disaster, make sure everyone is safe. Consider the possible impact it will have on their ability to be back to work.
• Assess the impact – inspect your business’ inventories and assess the impact a disruption would have on facilities.
• Prioritize critical business activities – make a list of activities based on their urgency, and fix each one of them according to the list
• Find alternative facilities, equipment and supplies – during this time, you might want to consider moving to a new working space (if it was a fire or disaster) or use another online storage system in the case of cyber-crime.
Planning for an emergency may sound like an onerous exercise, but by following these steps, you can help your business survive common risks and safeguard its success for years to come.
Mahyar Hansotia is president of accounting and tax services firm Sobel and Company.