The business world is unpredictable, and so too is the world we live in.
Minor and major events seem to appear out of thin air and can turn a business — and its financials — on their head. As with most financial situations, creating a plan is the most practical step in shielding for life's myriad of curveballs, but how do you begin to prepare for the unthinkable? How can financial professionals offering help with life insurance and retirement planning advise a client to prepare for a life-altering event?
The reality is there are rarely indicative warning signs leading into a financial disaster — if there were, you would have avoided financial disaster in the first place. A financial disaster is often associated with feelings like 'we never thought this could happen to us.'
(Related: Weighing the CMBS Impact of Harvey and Irma)
Instead, what you can do is put a plan in place to ensure you're prepared to respond when disaster hits.
First, let's explore the circumstances that may require the execution of a financial disaster plan. A financial disaster is any impact that requires the immediate need of monetary outflow that goes beyond the scope of cash reserves, or anything that impacts inflow resulting in the depletion of cash reserves. This can be anything from a natural disaster to an uninsured death or a sudden, sharp market decline.
When advisors talk with clients about having a disaster plan in place, the discussion should center around risk. The first step is identifying if a client has a general plan, either for cash flow or retirement. Assuming the answer is yes, determine if they can self-insure for a financial disaster. Many individuals and businesses believe this just means holding six to 12 months of cash — but that's not always the case. It's important to challenge clients to have a plan for a situation like a natural disaster, where they may not be able to operate their business or may be required to uproot their home.
Next, you will need to identify the areas of potential risk. Business-oriented risks include IT vulnerabilities, a public relations disaster, marketing and operations crashes, and more. Has your client thought about what could happen to the business if their lead sales manager dies unexpectedly? What if a hacker tapped into client data? Once the risks are identified, determine the potential loss, as well as whether or not the client or business is able to self-insure or if they should obtain insurance.
