Things happen … to businesses as well as to people. And the measure of how well a company is managed is not so much what has happened to it as how well it responded.
That is management’s responsibility.
Unplanned events, especially the unwelcome ones, are called contingencies by people who deal with them every day, from first responders who react immediately, to the accountants, lawyers, insurance agents, and financial planners who try to anticipate them.
Most smaller businesses do not have unlimited resources to develop elaborate “what if” plans, even though they need contingency planning more than their corporate big brothers.
Fortunately, the most important ingredient in contingency planning is thought, not money or other resources. And while there is no shortage of things to think about when managing a smaller business, some thought given to contingency planning will pay off for you just when you need it most.
There are two main categories of business contingencies: internal and external. An external event like a hurricane, earthquake, fire or a zombie apocalypse originate outside your business organization but can have a significant effect on your ability to continue operating.
Internal contingencies originate within your organization and include such things as a discontent or dissolute partner, a computer crash that leaves your company records irretrievable or a trusted bookkeeper departing for a Costa Rican beach, accompanied by more cash than you realized your business had.
In most smaller businesses external contingencies are the ones given more attention. If the cost of insurance against some external events was not included in your initial capitalization or cash flow calculations, it should be given a high priority as soon as possible … like now. Without insurance, even a minor fire or weather event could mean the end of your business.
The insurance agent that you select can be a valuable resource, but only you can provide the analysis of your business and how fragile, or not, its financial situation is. You should consider business interruption insurance as well as casualty insurance, for example, to help keep your business operating while damage is repaired. Some policies include this as part of a business package aimed at smaller businesses but some will need your initiative to find out costs and coverage. In the end, you are the one in position to make the best judgment balancing the threat with the insurance affordability.
It is the internal contingencies that usually get the least attention in smaller businesses. This is probably due to the lack of experience of entrepreneurial managers. They simply don’t realize how many different ways a business organization can unravel.
Years ago, Bennet Cerf and his friend, Donald Klopfer started the now-giant publishing company, Random House, without a partnership agreement. They apparently never even thought about it. After decades sharing an office, with their desks together, arranged so that they faced each other, they literally, in every sense of that word, were equal partners. They saw no need for a legal contract to restate the obvious.
That was several generations ago. Even in those days, though, when it was more likely that a person’s word meant something, it wasn’t a wise thing to run a growing business like that without an ownership agreement of some sort. The reason? Contingencies.
The plots of movies and television soap operas would have us believe that business crises and dissolutions are caused by a falling out of the partners or family members.
In reality, though, the causes are far less dramatic: a business that was a partnership or some sort of joint venture is shaken when something happens to a key player. It might be an illness or injury, a divorce, an automobile accident, or simply a sudden change in behavior on an individual’s part. Each of these contingencies can have an impact on a business’s continued operation.
The way to ensure the continuity of the business, and its ability to support its owners, managers and workers, is to construct an agreement among the stockholders or partners that deals with the conditions and specifics of buyouts, resignations, and the internal contingencies that cause great stress for a business.
An experienced business attorney can be very helpful in drafting an ownership agreement, even if you didn’t prepare one before the business started.
The shape and success of the agreement, though, will depend on your knowledge of the business and the people involved.
Taking these steps will help you prepare for the typical contingencies that afflict businesses. Don’t be discouraged, though, if something comes up that you hadn’t prepared for. Life is full of surprises. As former Secretary of Defense Donald Rumsfeld once said about anticipating future events, “There are also unknown unknowns. These are things we don’t know we don’t know.”
James McCusker is a Bothell economist, educator and consultant. He writes a column for the monthly Herald Business Journal.