This Small Business Saturday, small businesses face challenges beyond holiday tariffs.
Kristen Fanarakis
Associate Director, Small Business Policy & Innovation, The Milken Institute
Pandemic-driven volatility has made uncertainty the new normal. Natural disasters are striking with greater frequency in places that haven’t previously experienced them. More recently, unprecedented changes in federal programs and tariff policies have created economic uncertainty, complicating investment and planning decisions for small businesses.
Both economic and environmental shocks have a disproportionate impact on small and medium-sized enterprises, making proactive disaster planning now an essential part of strategic planning. All small business owners should be thinking proactively about disaster preparedness as part of their overall strategic planning. Recent history has shown us that a disaster plan is not just a contingency plan; it’s as vital to long-term financial resilience as the primary business plan.
Risk analysis
The first step in disaster preparedness is mapping where potential physical, economic, policy, and business model risks lie. Physical risks are the easiest to plan for when it comes to potential environmental disasters. Every business is subject to macroeconomic risk and should have cash reserves to pay operating expenses during an economic downturn. Policy volatility, such as changes in federal funding and tariff rates, and more recent risks like the COVID-19 pandemic, created existential risks to the entire business model for many small and medium-sized businesses. For example, the pandemic rendered makers of traditional workwear irrelevant for years. Also, changes in tariff policy increased the price of key components for manufacturers across industries, forcing owners to rethink pricing, production, distribution, or their entire business model.
These shocks highlight the importance of recognizing concentration risks: Reliance on a single manufacturer, supplier, or customer can quickly become a vulnerability. Business owners of all sizes have already forgotten the pandemic’s hard lessons on supply chain and redundancy planning.
Scenario planning
Once the risks are identified, the next step is to perform a scenario analysis. This involves quantifying and ranking risks by probability and potential impact, then considering how they might disrupt operations.
This exercise helps business owners pinpoint key exposures, whether in the supply chain, labor, or customers. It gives a business owner the framework to think about how and where they might need to diversify and then develop a plan to tolerate, treat, transfer, or terminate these risks should they arise.
For example, if you are a business that outsources your production in times of economic uncertainty, how vulnerable is your manufacturer? Do you have an alternative manufacturer? How quickly could you shift your production and at what cost? What happens if one of your major suppliers goes under? What happens if your major customer disappears or can no longer purchase your product? The federal government was once the largest consumer for many small businesses, such as farmers who sold to the U.S. Agency for International Development, but changes in policies and programs have upended the business models for countless small businesses over the last six months.
A structured disaster plan allows a business owner to think proactively about potential risks rather than reactively.
Stress tests
After the 2008 financial crisis, the Federal Reserve began stress testing large banks to evaluate their financial resilience under hypothetical economic downturns. Small business owners can adopt a similar practice as part of their disaster preparation. They can estimate their revenues, losses, and expenses under different scenarios to estimate how well their businesses might weather an economic or environmental storm.
Traditional advice suggests that small businesses have at least three to six months of operating cash on hand for emergencies. In today’s volatile environment, this is an overly simplistic way to plan for potential economic or environmental disasters. The company’s age, how many employees a company has, the type of company, cash burn rate, and the type of risks a company faces will all affect how much buffer cash your business needs.
What if a natural disaster hits and you lose your entire inventory? How much would it take to replace that inventory to get back up and running? Many small business owners rely on insurance to cover these costs, but as many North Carolina small business owners learned after Hurricane Helene, they did not have the coverage they needed to rebuild fully. How much cash would you really need if you had to replace your inventory? What would happen if you lost your customers during your busiest season, which is exactly what happened to those small businesses in Asheville? Those businesses typically generated enough cash flow in the fall and holiday season to make it through the slow winter season.
Resilience planning must go beyond generic rules and be tailored to each company’s unique vulnerabilities.
Small businesses today face unprecedented policy volatility, economic disruptions, and environmental risks. Disaster preparedness requires moving beyond outdated generic advice and thinking about resilience through comprehensive frameworks that business owners can adapt to their unique circumstances. More importantly, they need to use strategic frameworks that are grounded in risk analysis, scenario planning, and stress testing. Disaster planning is no longer optional. It is an essential survival strategy for small business owners, and their long-term success depends on it.
