By Sandra Taylor-Sawyer: Business columnist
Two words that should become part of every business owner’s regular vocabulary are, What if? The “what if” factor is the beginning stage of preplanning to prevent or minimize the damage of a catastrophe.
According to David Russell, author of “Insuring the Bottom Line,” a business owner’s obligation is to address potential problems and determine what will be done when the problem becomes a reality. This is known as risk management.
Risk management starts with “what if” questions such as these:
• What if the water line breaks and water rises to 4 inches, damaging a substantial amount of inventory?
• What if the electricity is out for 12 hours and there is $20,000 worth of food in the freezer?
• What if the computer crashes, starting a fire, and every item in the office is damaged?
• What if our building is destroyed by a tornado?
These scenarios are the tip of the iceberg of what can go wrong.
Russell suggests several steps to plan for a catastrophe.
First is to make a list of all potential mishaps. The list can be compiled using data from previous accidents, interviewing employees about what can go amiss in their work areas, reviewing financial statements, and conducting onsite inspections.
Each potential accident is mapped on a frequency and severity matrix. Frequency represents the number of times the accident can occur, and severity is the measuring of the impact.
Once the frequency and severity are assigned to each potential mishap, the business owner must determine which mishap should be covered or not covered by an insurance policy.
For example, if a business transaction such as reconciling the checkbook to the bank statement always produces a $1 difference, should it be insured? Most likely the answer is no.
However, if a warehouse where several thousand inventory items are stored experienced a high number of broken windows each month, it would be wise to obtain insurance.
There are many types of insurance coverage available, from accounts receivable to valuable paper. All storefront businesses should have at least property and liability insurance.
Based on the conclusions drawn from the “what if” questions, other insurance that includes appropriate coverage such as auto, business interruption, workers’ compensation, directors and officers, and product liability may be necessary.
Property insurance can include coverage for replacing income lost because of computer mishaps, known as Computer Operations Interruption. Coverage for the loss of electronic data can also be purchased.
According to the Insurance Information Institute, business interruption and extra expense insurance is vital to the survival of a business. In case of a mishap, such as a fire or a tornado, the business interruption insurance can provide funds in place of lost profits. The extra expense coverage can help with providing rent for temporary housing or leasing of equipment.
In light of the recent destruction to our area, it is a wise business decision to review current risk management issues and change or add insurance coverage as appropriate.
Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis.