Preparing for the unpredictable
In the last year running our healthcare company, we had a major hurricane and one of the worst ice storms in North Carolina history both within about five months. While we survived this double whammy, many small businesses did not. Ever since then I have tried to warn small business owners about the need to prepare for disasters.
Be it floods, like we just experienced here in Nashville, terrorist attacks, hurricanes, ice storms, and so on, small businesses are much more vulnerable to the impact of such events than larger corporations.
There are steps that an entrepreneur can take to prepare:
1. "Cash is King". There is no better tool to weather a disaster than cash. Having cash reserves allows businesses to make it through the initial economic paralysis of a major event. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.
2. Manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock. It takes less recovered sales to get back to breakeven.
3. Avoid fixed, long-term commitments. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.
4. Build in flexibility. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.
5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don't go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as "just in time" with your inventory as possible.
6. Create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.
7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. Entrepreneurs need to be bold leaders. As we saw here in Nashville after the flood, the best leadership will not come from the politicians. Instead, it will come from the grassroots of our economic system. Be strong, be brave and be confident and others will follow.
There are some excellent resources for small business owners for disaster planning. The SBA has a new website called Prepare My Business that offers information on planning, education, testing your key systems, and disaster assistance. And American Express OPEN has a new tool called InsuranceEdge to help assess the right insurance you need to protect your small business.
Every small business owner (and homeowner, for that matter) should heed these words from the SBA:
Ask yourself: what if the worst happened? How would it affect my business and my family? Would we survive if the business were closed down for weeks, months, or perhaps my entire revenue season? What can I do to make sure we survive?
Be a little pessimistic now, and assume it CAN happen to you. Develop a Disaster Plan for your home or business now so you can rest a little more easily in the future.
The SBA estimates that 25% of small businesses never reopen after a disaster, while other estimates run as high as 40-60%. The better prepared you are, the better your chance to be on the right side of those statistics.
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