Wednesday, November 26, 2014

Buying A Home Based Business Part 10: Disaster Planning


This article was written by Mike Capsuto, SCORE Orange County Business Mentor

“Backup my hard drive! How do you put it in reverse?” Unknown

Owners of newly acquired home businesses spend their time making the business grow at a profitable rate with little thought to potential disasters. Could your business survive if it was down for a day, a week, a month or longer or had a loss of a major supplier or customer? Here are some startling facts:

• According to the National Fire Protection Association, 381,000 residential fires were reported in 2012 causing 9.8 billion dollars in property loss. Sixty percent spread to areas other than the area of origin.

• The FBI estimates that 10% of all laptops purchased in the US will be stolen within the first year of ownership. Of those, only 3% will be recovered. It took businesses an average of 9 days and $49,000 in lost sales, replacement cost etc. to get operational again. In addition, 7 million smart phones were reported lost in 2011. Many were loaded with or had links to critical business data.

• Google reported 1 out of 14 hard drive crashes within 3 years.70 percent of small firms that experience a major data loss go out of business within a year.

• A Microsoft Security Intelligence Report estimated that 16 million new viruses are generated every two years.

• Based on the Council for Disability Awareness risk calculator, a healthy male age 35 has a 21% chance of having a disability lasting over 3 months before reaching the age of 65. The chance is 24% for a female in that same age group. The percentage increases by 14% for both males and females if they are overweight or use tobacco.

• The National Highway Safety Administration estimates that 2.4 million people are injured in automobile accidents each year.

• Over 47,000 business and 1.2 million non-business bankruptcies are filed annually according to the U.S. Courts.

• A study developed by the University of Minnesota found that a business which was put out of commission for as little as four and a half days, experienced up to a 50% loss in its capacity to operate.

What would happen to your livelihood if any of above adverse events were to occur?A disaster can happen the moment you take ownership of the business. Can you get your business back up and running quickly? Disaster threats are inherent part of being in business. They can be managed and their adverse events can be lessened through proper risk management.

Threat Sources

The first step in risk management is identifying the sources of threats. Threats can arise from natural disasters, auto accidents, risky personal activities, tax or regulatory changes, projects the business undertakes, failures in maintaining financial records or quality products, disruptions to operations from fire or power outages and family emergencies. These factors are not dangerous unless there is a corresponding business risk.

Risk Assessment

Next identify the risks that can occur within each source. Risks can include fire, burglary, arrests, data loss, or bankruptcy of a major customer or supplier. Once the risks are identified, assign a probability of occurrence such as high, medium,or low to each one. A high risk is likely to happen. A low risk is unlikely to occur.

Determine the Recovery Window

Key measures of the risk is the severity of the recovery time. The longer the recovery time the greater the impact to business operations. Most home based businesses have great difficulty recovering if the business is down for more than 3 days. Rate the recovery window as low, medium or high. If the business can recover within one day rate the recovery window is low. If it will take more than 3 days rate the recovery window as high.

Preventative Measures

Whether the risk is rated as high, medium or low, each risk requires an evaluation. Low risks with high or low recovery windows has the option of either accepting as is or doing some preventative measures. High risks with high recovery windows requires immediate attention. Others should be taken care of as soon as possible. Methods of reducing the impact of risks include avoiding risky activities, buying insurance against the risk or assigning the corresponding activities to a partner, supplier or creating a separate entity to handle the risk. The following brief scenario outlines the application of the above steps.

RB is a healthy 35 year old male. He weight lifts at the local gym three days a week. He also plays golf once during the week and on Saturday. After each golf game he has a few drinks at the golf club with his golfing partners and drives home. His home is over 20 years old and his office is in a room next to the kitchen.

Identifying the Threat

Risky Personal Activities:

• Weight lifting

◦ Risk assessment: Back injury

◦ Probability of occurrence: Low

◦ Recovery Window: High; > 3 days

◦ Preventative measures: Wear back brace; reduce weights; obtain disability insurance; business continuity insurance.

• Drinking and driving

◦ Risk assessment: Auto accident, DUI arrest, injury, loss of reputation. Legal fees, fines and bail could cost $10,000, more if property damage or personal injury to others are involved. This is money the business could use.

◦ Probability of occurrence: Medium (higher than a non-drinker; could be rated high if there is a history of drinking and driving, traffic violations or auto accidents).

◦ Recovery window: High, > 3 days, longer if convicted of DUI.

◦ Preventative measures: Carpool with a designated driver, stop drinking.

Home Emergencies:

• Proximity to kitchen:

◦ Risk assessment: Fire (most fires start in the kitchen and migrate quickly to other areas).

◦ Probability of occurrence: Low

◦ Recovery Window: High; > 3 days

◦ Preventative measures: purchase fire extinguishers; move office to other remote parts of the house; obtain fire and business continuity insurance;

• House over 20 years old:

◦ Risk assessment: Electrical fires; power outages.

◦ Probability of occurrence: Medium (most older homes are not electrically wired for the power requirements of a home based business and could result in fires or power outages).

◦ Recovery window: Medium < 3days unless there is a resulting fire.

◦ Preventative measure purchase fire extinguishers; rewire the house or office; obtain fire and business continuity insurance, obtain a backup power source.

The danger to home based businesses the business assets and records are normally in one location and the business is focused around one individual – the owner. An adverse event resulting from seemingly harmless activities can severely impact the ability of the business to operate. Sound risk management reduces the chance that a particular event will occur and, if it does, good risk management can reduce its impact and protect the business wealth.