January 19, 2018
MBAF's Tony Argiz discusses the best practices for weathering a natural disaster in American City Business Journal.
Even if you made it through 2017 unscathed by a hurricane, earthquake, wildfire or any other natural disaster, it’s easy to realize that last year was a year with one major headline after another about warnings, evacuations and recovery challenges for communities across the United States.
Although protection of people and property remains the priority, for firms doing business in affected areas, the financial repercussions can be serious — and can last long beyond initial recovery efforts.
How will you handle items such as maintaining cash flow, checking the status of your inventory, and addressing potential delays in receiving insurance payments?
The silver lining from the string of natural disasters seen in 2017, if there is one, could be the very real lessons learned that could help strengthen your financial and operational resiliency before, during and after such an event. The goal is to plan ahead and avoid major disruptions to cash flow, operations, financial planning and more.
1) Take it step-by-step
Having a plan in place before disaster strikes makes sense, but what strategies work best? One useful approach is for company leaders to take a step back and think on a step-by-step basis about how the business operates. Think about what would happen if any one component went down, internally or externally. How would the business continue to operate?
From an operational standpoint, if you have no electric power, how are you going to do business? If a whole state, area or island also loses electricity, can your business continue to pay its employees and vendors?
Consider the life cycle of your business and how to maintain operations if any or all of those variables goes down. Map out your operations, map out your financial reporting, and think about how you will capture financial information so you will be able to continue doing as much business as possible.
Unfortunately, as can be seen above, it might not be as straightforward as putting up shutters or having off-site backups for IT. Effective planning also involves consideration of communication. How will employees know when to return to work? How will your customers and community know that you’re still open?
2) Consult outside of accounting
Before and after a disaster, people in operations can be a good source of updated information because they may have hands-on and real-time knowledge.
For inventory, consider talking to the people who are responsible for the inventory, such as the warehouse or other appropriate personnel. You might find out ways inventory can (or has) become water-logged, otherwise damaged or completely unsellable. Or you may realize that an extended power outage may be causing inventory to spoil, which may require a write-down for accounting purposes.
For property, plant and equipment, consider talking to the people who maintain your facilities in effected areas. You might learn a building has sustained substantial damage or is otherwise not fully operational.
3) Boost your financial fortitude
From a financial standpoint, what is your plan for each of the accounts on the balance sheet? How is each of those items going to be affected from a financial reporting perspective? A lot of this is going back to basics; standard accounting principles will apply, even in the wake of a major disaster.
Consider your fixed assets (as in: property, plant and equipment). Accounting personnel often roll that forward year-to-year with a steady depreciation over time. However, after a disaster, you might have to consider whether or not a certain property is impaired, such as if a building lost its roof.
Also, avoid a common mistake that can misstate your financial statements. The accounting for insurance proceeds from a GAAP and a tax standpoint can be very different. A lot of people may not realize there is a difference and they may try and use the tax treatment in the GAAP financial statements. This can result in a material misstatement.
4) Expect an insurance reimbursement mismatch
The immediate aftermath of a major disaster can decrease your customer base, slash your sales and increase your expenditures. Companies typically get the insurance money later. So be prepared and well-capitalized to ride out this mismatch, where you have more money outflows at first followed by cash inflows later.
If your firm is not as well-capitalized, how nimble is it? Do you have lines of credit? Will a related party be able to put in money? Can you delay certain expenditures? Overall, can your firm survive financially until insurance money comes in (assuming said insurance money will be enough)?
Natural disasters are unpredictable, and with any luck you won’t experience any major events in the new year. But chance favors the prepared, so it’s worth the effort to develop effective financial contingency plans now – so you, your customers and the communities you serve will not be left in the dark.
Steven Morrison, principal in the audit department at MBAF, contributed to this article.
Tony Argiz is the chairman and CEO of MBAF, one of the top 40 public accounting firms in the nation. A nationally recognized practitioner in litigation support services, Argiz has extensive knowledge and experience in practices involving audits, business planning, economic damages, fraud examinations, valuations and litigation cases.
Click here to read the article on American City Business Journal.