Sometimes we as financial advisors have to ask tough hypothetical questions to reveal deficiencies in a small businesses contingency plan. A recent bank survey found that more than one-third of Alberta small business owners don’t have any contingency plans. This is especially fresh on the minds of many as a result of last year’s severe weather in southern Alberta.
The floods in Canmore, Calgary, and High River had a significant economic impact on many small businesses, from which some will never recover. And a long winter with heavy snows and cold temperatures has impacted our farmers and construction industries. 10% of Alberta small business owners cited weather as the primary cause of an interruption to their cash flow in the past year, followed by illness or personal issues.
It’s critical to have a small business contingency plan in place to withstand business interruptions without draining personal savings. A line of credit, cash reserves, loans, personal savings or even credit cards have been used during business interruptions. But an extended interruption could finish many small businesses and possibly devastate personal savings as well.
Two highlights from this survey were that over a third of Alberta small business owners said that they were rethinking their contingency plans as a result of the impact of last year’s weather events. Another third revealed they didn’t have any contingency plans in place and in hindsight stated that they needed some.
In my 20 plus years working in the farm equipment business, I experienced first-hand the impact on both our business and on clients’ businesses the very negative impact from not having contingency plans. As mentioned in previous articles, losing a partner in a plane crash would have finished our business had we not had a funded buy-sell agreement in place. Without life insurance funds to buy back the deceased partner’s shares and pay off business debts, we would have been out of business in three months.
Have a business interruption plan
Small business owners should assess the impact of potential business interruptions. Review risks such as the length of time you could operate without any revenue coming in, then develop a plan to manage the risks.
Build flexibility into your plan
Natural disasters and other unexpected events can catch small business owners off guard. Be sure your business can withstand these by having a flexible and forward-looking contingency plan to ensure your cash flow, sales, service, and savings are protected.
Consider key person insurance
Would your business continue to run if either you or a key employee became sick or disabled and was away from work for an extended period of time?
Consider business interruption insurance
Business interruption insurance supports you when your business cannot operate as a result of a covered loss. It pays your fixed expenses such as utilities, taxes and even employee wages, and includes business income insurance to cover your loss of earnings. Coverage begins from the time of the loss and continues until you’re able to reopen your business. The level of coverage you need depends on the kind of business you operate.
These are just some of the issues to consider, as every business has different risks to consider. As in all things financial, be sure to get advice from a qualified licensed professional, so that your business is not caught short when disaster strikes!
Image used by permission, Tom Martin Art