Unpreparedness is a major reason why 40 percent of all businesses hit by a natural disaster fail to reopen, and another 25 percent that reopen close within a year, according to the Federal Emergency Management Agency.  Such a high failure rate is not surprising, say experts.  Many small businesses operate on thin margins, and any major disruption in cash flow is often fatal. Businesses that reopen often are crippled by staff turnover, increased debt, or, in the event of a widespread disaster, a regional or even national economic downturn.

While a small business cannot always prevent Mother Nature or terrorists from striking, it can prepare financially for such a catastrophe. Here are some steps to take.

Assess the potential risks. Some businesses need only rented office space and a few phones to be up and running, while others depend heavily on their existing structure and production facilities. Analyze what types of natural disasters you potentially face, and what impact different disasters might have on your ability to continue operations. What inventory is at risk? How quickly could you find alternative office space? What would happen to your employees, customers, suppliers and distributors?

Prepare a plan. Prepare a disaster recovery plan before a calamity hits. Prepare and practice an evacuation plan for your employees and customers.  Identify the activities and resources critical to resuming operation, including a list of skeleton staff.  Identify alternate locations, equipment and suppliers you could use. Keep a list offsite of key people to contact, including disaster-relief agencies, clients, suppliers and insurance companies. Keep insurance policies offsite, and keep emergency cash reserves somewhere that won't be affected by a local disaster (the bank next door could close down along with you).

Reduce risks. Damage from a disaster often can be minimized or even prevented. Have an insurance company assess the potential risks and update this assessment annually. Modernizing or building to the latest codes, and having alternate power backup, could minimize damage. As the World Trade Center attack illustrated, backup of computer data alone can mean the difference between being able to reopen almost immediately in a different location or never reopening again.

Insure against risk. Experts say that premiums and deductibles will go up for businesses in the wake of the terrorist attacks, and not just for businesses in New York City. So you'll need to review your property/casualty insurance carefully with your insurance agent or financial advisor, and review it annually thereafter. First, be sure the coverage reflects recent building improvements or additional property. Will the coverage rebuild or repair according to higher building codes? Will the policy cover replacement costs at current prices, or only at a set limit or depreciated value? What kinds of disasters will it-and will it not-cover? For example, coverage for terrorist acts will almost certainly be excluded in future policies, and earthquake and flood damage is typically not covered under standard policies.

Do you need inventory coverage? A financial planning professional recalls a client who turned down his recommendation to insure his produce inventory and the client subsequently lost hundreds of thousands of dollars of produce in a hurricane. Business-interruption insurance covers lost income and overhead expenses when a business must temporarily close its doors due to a disaster. For example, the anthrax scare might be considered vandalism, which is usually covered in business interruption insurance. Check for special riders and compare policies for your special needs. One insurance company paid a fire-ravaged health club for income lost during rebuilding, but not for the hundreds of thousands of dollars in prepaid membership fees the club had to refund.

Be familiar with disaster resources. Did you know that the IRS allows business owners to amend their previous year's taxes to claim disaster-related casualty losses if the president declares a disaster? That can put much needed cash in your pocket more quickly. The Small Business Administration may be able to provide low-interest loans, and your state or local Economic Development Agency may be able to help. Identify these organizations ahead of time.