Intensifying competitor discounts, rising expenses and increasing regulation: These are all daily risks in the business world that companies guard against. But what about major disasters?
Entrepreneurs often overlook preparation for these rare events and focus instead on more pressing details, but taking steps to prepare for the unthinkable can be the difference between surviving and failing after a major storm.
About a quarter of small businesses will not reopen following a major disaster, according to the Institute for Business and Home Safety. The Federal Emergency Management Agency (FEMA) said this rate could be as high as 40 percent.
While specific threats to each business will vary based on size, location and type of disaster, entrepreneurs need to be better prepared, said Mark Norton while he was the director of continuity planning at Agility Recovery Solutions, a disaster recovery firm. Norton has since become the firm's director of member services.
"Risk is something that is happening everywhere," Norton said in a presentation. "No one can really fly by that excuse that disasters don't happen here. Even if they haven't happened in the last two to three years, that doesn't mean that going forward you don't need to be thinking about these risks and threats."
Here are four steps small businesses can do to ready themselves when a disaster does strike:
One of the biggest risks for entrepreneurs is unpreparedness.
While insurance companies faced 1.2 million personal property claims and more than 156,600 business claims in the wake of Hurricane Katrina, only 167,900 policy owners received payment for losses caused by floods.
Even though the disaster brought to light that homeowner's insurance does not cover flood insurance, the Insurance Information Institute found that a decade later, 43 percent of homeowners either believed that their insurance covers floods or did not know.
"The time to review your insurance policy is before disaster strikes and you have to file a claim," said Loretta Worters, vice president of communications for the Insurance Information Institute, in an interview last year. "It is important that your business have both the right amount and type of insurance for its needs and risk profile."
Loss of electricity can greatly affect businesses big or small and is one of the most common aftereffects of a natural disaster. According to Agility Recovery, power loss of at least one hour will affect up to 70 percent of businesses each year. In the case of large disasters, companies could be without working utilities for days or even weeks.
In the case of Hurricane Katrina, more than 1.7 million people lost power in the Gulf states, according to the National Oceanic and Atmospheric Administration.
Portable generators are a viable solution for power loss, however, businesses need to calculate their required power output prior to purchasing. Overtaxing a generator can damage the device and any connected equipment.
"A terrifying example is … the people who run out and get a portable small generator from Home Depot or Lowe's and actually bring them inside the office to generate power, " said Norton. "And you're thinking … 'Well, that's such a silly idea with the gas and the fumes, that's just a huge hazard.' But, in a disaster, when you are just reacting, if you haven't thought about this before it could actually seem logical."
Ensure that you understand how to use the equipment as unsafe practices could shut your business down even if the storm doesn't.
Worters also stressed the importance of having utility service interruption insurance, "which provides coverage for direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations and equipment of suppliers of those services."
Loss of power is a catalyst for a number of business-halting risks. Even an hour is a significant amount of time to be without electricity. Companies can lose money and customers if they are unable to access telephones, emails or client data.
"To get your business up and operating after a disaster, you'll need to be able to access critical business information," Worters said. She suggested backing up computer data and creating an offsite list of all insurance policies, banking information and vendor information.
"If you have a backup site, make sure it's sufficiently far away so as not to be affected by the same risks that threaten the primary location," she added.
Not only does your business need to be able to survive the storm, but you need to have a strategy for when you are rebuilding your business. Companies should have a rainy day fund to cover extra expenses, employee wages and other incidentals as repairs and insurance claims can take weeks to months to complete.
Always expect that restoration can take longer than initial estimates. Agility Recovery estimated that it takes 11.5 days for a business to become fully operational after an event. However, Norton suggested having a disaster plan that extends up to 30 days.
"Oftentimes we only think that we need to survive the first 24 to 48 hours," he said, "and we're not thinking about … what would we do in week two or three that we didn't even have to think about the first couple of days of the disaster because it wasn't that critical?"
Worters adds that having a business interruption policy, which is part of a typical business owners' policy, is key in paying for unexpected expenses that arise after a disaster.
Businesses can add coverage of up to 720 days to the business interruption policy.
"Not only does your business need to be able to survive the storm, but you need to have a strategy for when you are rebuilding your business. Companies should have a rainy day fund to cover extra expenses, employee wages and other incidentals as repairs and insurance claims can take weeks to months to complete," Worters said.