When you sit down and think about all the things that can disrupt your business operations, you can probably identify and prepare for many.  Things like weather, public services disruptions, public protests, strikes, loss of a key employee, software malfunction, hardware dysfunction.  How does a business protect itself from disaster and near disasters – temporary or long term?

The first step in the process is to identify the range of things that can happen from the “most likely” (loss of a key employee or server crash) to the “least likely” (you know the get-struck-by-lightning or win-the-lottery end of the spectrum – which statistically will eventually happen to someone!).  By identifying the possibilities, you can begin to develop contingency plans to deal with these catastrophes and near catastrophes before they happen.

Contingency planning –identifying the alternatives for dealing with each type of event – is the second step.  Think about contingency planning as planning a trip.  You have your origination point and a destination in mind.  You have a choice of transportation modes and various route options.  The combination of route varies with transportation type and vice versa.  If you plan a trip by plane with no layovers and then learn that all plans are grounded due to weather conditions at your destination airport, of course you look for alternatives – changing dates and times, taking a different route, a different airline, or looking at other modes of transportation such as driving.

Businesses need to have plans and be able to take the third step – having a process for enacting contingency plans when a disruption occurs.  Having a “what to do” plan without knowing how to do it when the crisis is at hand is the same as not having a plan.

Recently a municipality had issues with its water system.  One area of the system tested positive for e coli bacteria.  For public health and safety, a “boil water” advisory was issued.  The impact of the advisory was more than inconvenience for residence and business owners.  The entire community had to deal with the temporary closure of any “food preparation” entity – restaurants, bars, hospital and nursing home kitchens, and components of businesses such as movie popcorn concessions, – all had to find a way to maintain public health and safety and if possible keep the doors open.

Some eateries had operations which could be maintained by shifting to disposable containers and bottled beverages.  That kept the doors open even as profits plunged.  Others had no plans or operations which could be readily adapted to alternative delivery.  In just a few days, the profits of many were significantly impacted by the loss of business.

The fourth step is to have “financial backup” which can provide some mitigation of the impact.  Usually revenue losses and the cost of getting a business back up and running are two different types of protection…at least in the commercial insurance world.  A business may have one or the other or both as a means of offsetting the potential financial risks of operation disruption.

Insurance which involves profit replacement is commonly referred to as business interruption insurance.  The second type, extra expense insurance, is used to cover reasonable costs associated with getting the business back into operation. Here is a simplified description of both types of insurance – enough to get you thinking:

Business interruption insurance (BII) “reimburses” you for lost profits when your company has to shut down for things covered under property insurance such as a fire.  BII bases the profits it covers on profits as documented by your financial records.  A policy also covers operating expenses, such as utilities, which continue even though business activities have come to a temporary halt.

The extra costs to get a business back up and running quickly are covered under Extra Expense Insurance (EEI).  EEI covers reasonable costs a business spends above normal operating expenses related to reducing or avoiding the time a business has to shut down during a restoration period.

In addition to insurance, a business should consider having a “rainy day” fund or reserve.  This may be actual cash or an emergency credit line which can be accessed to get the business back up and running and/or cover on-going costs while the business is idled.  Sometimes, all a business can do is weather the storm and wait for conditions to change before they can get back to business as usual.  In that situation, being able to cover the bills is the only action available.

Whether you have a rainy day fund, are insured, or are counting on luck, a business cannot afford to avoid thinking about how to act in the face of a disaster.  Every day businesses large and small are impacted by the unexpected.  What is a small problem for one can have catastrophic impact on another.  It all comes down to having a plan, being able to implement the plan, and get things “back to normal” as quickly as possible.  Are you prepared for the next disruption?  Here are four steps to begin the preparation process:

  1. Identify the potential disruptions for your business
  2. Develop a plan to deal with the most likely and most severe disruptions
  3. Know how to put the plan into action – who, what, when, where, etc.
  4. Prepare financially with a combination of reserve funds, insurance coverage, and/or emergency lines of credit

Business interruptions occur for many reasons.  The costs and damages to your business can be at least partially offset by being prepared in advance.  An ounce of preparation is worth every dollar it saves.

Copyright ©2007 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

Verified by ExactMetrics