As in the wake of 9-11, we have seen businesses paying more attention to their disaster plans in the days after Katrina. Red Herring has telling examples from the technology sector.
Here are some suggestions on how entrepreneurs can prepare for disasters:
1. I would suggest for any business that the cliche’ “Cash is King” has never been more true. After Katrina, there will be a prolonged period where many businesses almost ground to a halt. Having cash reserves will allow businesses to make it through the initial economic paralysis. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.
2. Good advice any time is to manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock.
3. Whenever possible, avoid fixed, long-term commitments that are part of a static business model. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.
4. Build in flexibility in all decisions. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.
5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don’t go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as “just in time” with your inventory as possible.
6. Think through the ‘what ifs’ and create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.
7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. People in the Gulf region will need bold leaders, which are now seeing will not come from the politicians, but within the grassroots of our economic system. Be strong, be brave and be confident and others will follow.
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