Disaster plans for small business
Updated: Dec 1, 2020
The U.S. has sustained 279 weather and climate disasters since 1980 where overall damages/costs reached or exceeded $1 billion (including CPI adjustment to 2020). The total cost of these 279 events exceeds $1.825 trillion.
You may think of a disaster recovery plan as a luxury reserved for big businesses with the budgets and staff to create one, but since small businesses usually operate out of a single location and likely do business in the same geographic area as their customers — who would be equally challenged by a major weather event — their need for a business interruption plan is even greater.
It’s a sad fact that 24% of small and medium-sized businesses permanently close their doors after being hit by a major storm — with or without tornado activity. The Small Business Administration provides business-saving bridge loans for those who qualify in the wake of a natural disaster, but small business owners still face losses averaging $3,000 a day for every day that they are out of operation.
I felt relatively safe, weather-wise, opening a business in Denver. I had no fear of earthquakes or hurricanes in the shadow of the Rockies, though we had our share of tornado activity. So I bought a business built on high ground, to minimize my concern about flash floods, and soon grew accustomed even to the daily hailstorms so prevalent in July. We had a lot of lightning strikes, but I had a lightning rod on the roof.
Disaster plan? I was running an approximately $1.25 million business that employed 25 people. My profit margins made it hard to even hire enough help to allow me to take a paid vacation, let alone hire a business consultant to explain how to write a disaster plan! Then, in the middle of an otherwise glorious summer day, the roof of our business was nearly blown off in a tornado that did, in fact, pull off seven rooftops in my residential neighborhood miles away.
I soon learned how much $3,000 x 7 days was, with extra cost for emergency repairs that had to be paid prior to insurance reimbursement.
I was lucky that insurance did pay for the physical repairs, though not for the cost of business interruption. The New York Department of Financial Services investigated more than 100 complaints related to business-interruption insurance denials in the aftermath of Hurricane Sandy. Most experts concluded that because of the hassle and cost (beginning at $10,000 for attorneys’ fees) to challenge insurance denials, those 100 complaints represented a fraction of the number of businesses that were actually wrongfully denied coverage.
Five months after the tornado, during the first winter that I owned the business, Denver was hit with a record-breaking snowstorm. The governor declared a state of emergency and local residents were prohibited from driving two-wheeled vehicles on city streets for three days — streets that overnight accumulated three feet of snowfall. That blizzard marked the second time I had to offer a signature loan to the bank to make payroll. The third and last time was when someone embezzled $20,000 the day before payroll was due, but that’s another kind of disaster for a different blog. The point of this one is to benefit from my sorry example of what not to do.
Only 43% of small businesses have disaster recovery plans even today. With 20/20 hindsight, I’d suggest at least perusing ready.gov, which offers advice from FEMA for crafting a disaster plan as your first line of defense for your business (or your personal finances). You can’t prevent or even anticipate weather disasters, but having a core disaster recovery plan can go a long way toward settling your nerves when the wind starts howling outside your office and you look up and see … the sky.