disaster planning

Prioritize Disaster Planning Beyond Insurance

by | July 31, 2020

As the pandemic and related lockdown took hold in March of 2020, companies immediately began to look for ways to protect their businesses from the damage. Insurance coverage, of course, was a first thought – but in most cases, insurance didn’t deliver. Many companies were stuck with no revenue; other companies were stuck because their people couldn’t come in to do the work. There was a myriad of other scenarios – but insurance wasn’t the fix.

What are business owners supposed to do in these situations? Is there no way to protect against these kinds of losses? What could we have done differently when disaster planning?

We can say that the current disaster is unlike any other and there was no way to prepare for it – but that’s untrue. When we reflect on the problems the lockdown has created, they aren’t much different from other disasters – ones experts tell us to prepare for because insurance isn’t available. Earthquakes and floods are good examples. The insurance may be available, but it’s incredibly expensive and most businesses don’t invest in it. They are willing to take the risk, recognizing that the likelihood of the event occurring is low, and if the damage is significant, the government will likely assist them. This pandemic is not much different.

Just like the aftermath of any disaster, we can evaluate what we could have done differently to prepare our businesses better. How should we prepare for the next disaster? Or, prepare for one that may look different but ultimately has the same effects? For years, I’ve heard risk management professionals harp on the need for companies to invest in “business continuity planning” or “disaster planning.” Still, very few companies spend the time to really do so. Now is the time, while the damage is fresh in our minds, to take the first steps in disaster planning for our businesses. Here are a few questions to consider.

What are the dependencies of your business?

Physical Spaces

A big ah-ha discovered during this disaster is the dependency most businesses have on physical spaces. Small restaurants and retail shops relied on people coming into their stores – even though Amazon® and Door Dash® were available. Businesses set up offices where employees worked together, in person – even though remote work was available. When the lockdown began, the reliance on physical togetherness became a liability. It’s time to plan for different scenarios where your physical space isn’t available (i.e. natural disasters) and what your business needs to have in place to survive.

Supply Chain

Many business’ operations struggled because they were unable to get the resources needed to perform their work. With businesses around the globe shuttered and travel limited, resources ordinarily available, such as raw materials, were held up. Having a plan in place and establishing the necessary relationships to fulfill your business’ needs from a variety of resources will limit this risk.

Key People

A business may also be dependent on one or more key people for production. If those individuals are unavailable due to travel restrictions, illness, or other limitation, your business must have a way to seamlessly shift to others within the business. Cross-training and process documentation are the most common tools used to plan for these limitations.

Does the cessation of business activity cause you to breach any contracts?

Another significant fear arising from the pandemic was how to satisfy customer contracts when a business is closed. In the U.S., we didn’t experience a national closure but rather a state-by-state mandate. Therefore, a customer in Indiana might still expect (and need) delivery under the contract – even if your business closed. This may be the first time most businesses have read the “force majeure” language in their contracts. It’s important to think about how your contracts are written – not only the force majeure language but other provisions, such as payment terms, that provide flexibility when needed. These items will help when you are doing your business’s disaster planning.

What cash buffer do you keep in your business when disaster planning?

Cash is king, and no cash is a significant problem. A 6-month buffer of cash that covers fixed-cost operations is recommended. Businesses need to self-insure somewhat, and that’s what cash does. Yes, the government may help out – but you can’t rely on the timeliness, size, or duration of that support. You must know what your business needs to withstand the storm of a partial or complete loss of business. We saw this same effect in the Great Recession and it’s critical to survival.

How quickly can you pivot?

We’ve seen lots of stories of businesses that have shifted their model in response to the lockdown. They looked at what resources they had, such as relationships or technology, and evaluated what they could do differently with those resources and how quickly they could put the new plan into effect.

Understanding the dependencies of your business and having a plan to shift gears quickly will ease the panic and stop the immediate bleeding when a disaster occurs. Without a doubt, we will experience another one. It might look different, but its effects will be similar. Prioritize disaster planning for your business and weather the storm.

Enlist Help

You are not alone – Speak with an attorney to discuss your business health and risk assessments, incorporating compliance and governance into risk management, reviewing contracts, creating policies and procedures, and more. Contact us at 425-250-0205 or contact@equinoxbusinesslaw.com.

Legal Disclaimer: This article contains general information and should not be viewed as legal advice. You should talk with counsel familiar with your unique business needs before taking or refraining from any action.