Do You Have a Cash Reserve in Case of Crisis?

Most of us don’t like to dwell on potential disasters, having the mindset that “that sort of thing happens to other people, but not in my town (or neighborhood, or business zone).” Yet we have only to look at a newspaper or read today’s news feed to see stories about businesses very like ours that are enduring extended business disruptions due to natural disasters. It’s enough to give you goosebumps.

Recovery Is Harder Than We Think It Will Be

We too easily forget that the infrastructure and support services we rely on to recover from disaster are often impacted by the same events. Hurricane Katrina proved how a lack of planning can result in even worse horrors after a storm. Seven years later, Hurricane Sandy demonstrated that even with planning, we can’t necessarily think of everything.

Natural disasters are trending bigger: Hurricane Katrina in 2005 left $16.3 billion in damages, and Hurricane Sandy in 2014 had a cost of $8.3 billion along the Northeast coast. By 2018, fourteen natural disasters (including hurricanes, wildfires, winter storms and tornadoes) cost the U.S. an estimated $91 billion per the National Oceanic and Atmospheric Administration (NOAA). 2018 was the eighth consecutive year that eight or more disasters cost at least $1 billion each.

For each disaster numerous infrastructure problems compound actual damages. Businesses and households lose power, and only those with emergency generators have running water. Nuclear reactors experience “trips,” or sudden shutdowns during the peaks of storms, and gas fires can occur while firemen struggle to access disaster areas. Millions can remain without power for weeks. Transportation shuts down across affected disaster zones; hospitals lose generators; flooding may mean stores won’t receive goods to restock shelves; with no power, they can’t refrigerate what they do have. Gas stations can’t pump gas without power, nor can trucks deliver new fuel. That means long-term gas rationing on top of trying to restore basic services.

In years past, we’ve talked with Second Wind members who suffered business shut-downs during weather events, or struggled to right their financial ships after crises ranging from the death of an owner, to fire, to prolonged post-storm power outages. Many of those agencies did not have detailed business continuity plans to help them react quickly to preserve their businesses and get back in operation. Some had no plans at all.

Continuity Planning

Beyond the human toll, businesses often suffer closures from such events. Per the U.S. Small Business Administration (SBA), an estimated 25 percent of small businesses do not reopen following a disaster. Whether your agency will join that group depends on your developing a sound business continuity plan, and ensuring you have financial reserves sufficient to maintain your business.

One big factor in continuing to operate during and after a crisis is having cash reserves. A JPMorgan Chase Institute study reported recently that small businesses across the U.S. are “living month to month,” with on average just 27 days of cash reserves to lean on during a crisis or should cash flow suddenly stop.

Funding Continued Operations

Your cash reserve and liquidity will allow you to cover expenses should something happen to suddenly stop the flow of incoming cash. Per JP Morgan Chase Institute, small ad agencies (in the study, professional or high-tech service firms) probably have cash reserves of between 25 and 35 days.

Nearly a quarter of all small businesses have just 13 days of cash reserves. Even small businesses with the best cash reserves—real estate groups—have just 47 days of cash reserves.

As you conduct business continuity planning, assess your agency’s cash reserves, and make an effort to keep a certain amount of cash available for emergencies. Like insurance to cover your offices and equipment, cash reserves give you a cushion between a sudden crisis and facing total closure of your business.

Check Your Cash Buffer Days

According to JP Morgan Chase, cash buffer days are the number of days you can cover cash outflows before exhausting your cash reserve, assuming no cash is flowing back into the agency.

Calculate your average daily cash outflow over the course of a month, including utilities, payroll, and other regular expenses.

A (Monthly Cash Outflow) ÷ 30 = B (Average Daily Cash Outflow)


Now look at your current cash balance—how much money you actually have in the bank. How many days can you continue to operate if cash inflows completely stop? That is your cash buffer.

Cash Reserve ÷ B (Average Daily Cash Outflow) = X Cash Buffer Days


Remember that during recovery from a disaster or other crisis, you may have additional expenses over and above those typical for normal operations. So in addition to cash reserves for non-disaster crises (like the sudden demise of an agency owner), consider setting aside emergency funds toward disaster recovery if at all possible. A business continuity planner can help you assess risks and possible emergency expense needs, and arrive at an estimate.

Don’t Count on Insurance (or Clients) for Quick Cash

Insurance is great until you need it; in a crisis, like a major flood, tornado or earthquake, insurers will be processing thousands of individual and small business claims, and insurance money may not be immediately available to assist with immediate needs. An emergency cash reserve gives you something to work with until insurance or emergency assistance arrives.

Also, if your best clients are local and a natural disaster hits, they could be unable to pay outstanding invoices, and new work could dry up as they, too, try to recover from a big financial hit. You cannot count on accounts receivable to answer immediate recovery needs.

Assess Your Area’s Risk Factors

Are you located in a flood plain? Be aware that ocean rise is causing routine high tide flooding in many coastal areas where it was until recently not a problem, and is forecast to become more frequent. Also, flood zones maps are being adjusted to reflect these changes; while you may not think you’re in a flood zone, you should check current zones with insurance providers. If you can afford it, invest in flood insurance for your business.

Are you in an earthquake region? Do you work in Tornado Alley, or an area prone to straight line winds? How frequently does your area suffer blizzards or heavy storms that cause power outages? Any part of the country can be hit by hail storms or heavy rains.

Aside from natural disaster potential, look at other risks, like working near a chemical plant, nuclear power plant, or other industries where incidents could force evacuation. Look at the age and health of agency principals; do you have successors in place? Do you at least have a defined chain of command should accident or sudden illness compel managers to lead the agency for an extended period? Are legal arrangements in place to permit those people to access bank accounts, sign paychecks, pay vendors, deal with clients, and so on?

What happens if a disaster strikes… just as your corporate taxes are due, or your 401(k) deposit? Cash reserves should be separate from these kinds of annual obligations. Cash reserves should indeed be reserved for emergency operations.

Yes, we know all of this is scary to contemplate, but having a plan in place can give you, and all of your employees, some security. You will all know what to do if a crisis occurs, and maintaining cash reserves to execute those plans will alleviate at least some of the stress of working through sudden crises.


Download FEMA’s Emergency Management Guide for Business and Industry to review the many facets of planning for disaster recovery.

You can find some additional planning worksheets at PrepareMyBusiness.org.

See also: In The Wake of the Flood

Business Continuity: Do You Have a Plan?

Can You Survive Disaster?


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