The costs of business disruptions can severely impair finances

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Economic impact and decrease due to coronavirus pandemic background. Photo:

Business disruptions can come in many forms such as the COVID-19 pandemic, social unrest (with property damage, rioting and looting), fires and cybercrime. These business disruptions may have unrecoverable effects on a company’s finances.

As we have seen with the COVID-19 pandemic and the subsequent lockdowns, thousands of businesses were affected and many firms went out of business. This was mainly due to the inability to trade. But in the case of the social unrest it was also as a result of the absence of recovery services and the necessary infrastructure to facilitate operations.

Some of the costs of disruptions are the impact on cash flows, lower revenues, higher costs and ability to raise capital.

When disasters occur, including security data breaches, companies can experience significant declines in revenue as well as an increase in expenses. Cash is king in any business and without cash or with minimal cash, it’s difficult to continue operations.

A disruption can impact revenues. Revenues are dependent on sales and when activities such as order taking, order fulfilment and order shipment are impacted by business disruptions revenues decline or disappear.

Suddenly because of a business disruption the business owners and managers will be faced with higher costs. With lower revenues their normal operating costs such as salaries, loan payments, rentals, or tax payments will in fact be much higher with the lower revenue. The company will face a serious problem in trying to cover expenses.

If the company needs to raise capital with lower revenues and increased expenses it faces severe limitations. Banks might decline lending funds or they could charge a significantly higher interest rate.

In the recent past we have seen how even very large companies have been financially impacted by the pandemic disruption as well as the social unrest that led to vandalism, looting and other crimes. The cost of the inability to trade has been enormous. The social unrest has cost companies billions. In addition, some companies, including many factories, have had to shut down their operations for good.

Losses in these circumstances are unavoidable. A business continuity management system and business continuity plans can only go so far in minimising the impact of these types of unplanned for business disruptions. However, and this is a very important point, business continuity planning can assist in getting the business back up and running as soon as possible. By being able to restart operations sooner, revenues can begin to grow again and increase cash flows to enable the business to survive the business disruption.

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