Financial Contingency Plan: A Simple Guide

A financial contingency plan is necessary not only for established businesses but also for those in their nascent stage. The entrepreneurial world is dynamic, and setbacks can happen at any time. You could experience technical failures; your partners could declare bankruptcy; you could even face disruptions due to natural disasters.

Without a financial contingency plan in place, these unexpected situations could potentially harm your business. In this guide, we will cover everything you need to know about financial contingency planning, including how to create one and what you should include in your plan.

What Is a Financial Contingency Plan?

A financial contingency plan is documentation of your worst-case business scenarios, how they would impact your company, and what your course of action would be. It mainly focuses on financial and resource allocation and is usually the difference between the survival or failure of a business in times of crisis. Think of it as a playbook for when you’re facing downtimes.

The main aim of a financial contingency plan is to ensure your business doesn’t go under when a disaster occurs. For instance, if you start facing cash flow problems due to an economic crisis, the plan should highlight efficient ways of sustaining precautions, either by cutting costs or raising funds.

Your financial plan should also contain more than one risk factor so that your business is covered on all fronts.

What Should You Include in a Financial Contingency Plan?

There are 2 key areas that you should highlight in your financial contingency plan;

  1. Your immediate response in times of crisis.
  2. The steps you’ll take to normalize operations.

Make sure you include both short-term and long-term responses. For instance, if your revenue streams are suddenly cut short, an effective short-term plan could be about leveraging your existing credit lines. The long-term response, on the other hand, could focus on reducing your expenses and stopping operations on unprofitable departments and diverting the extra finances to more profitable ventures.

Even though the risk factors in a financial contingency plan vary based on your business type and size, there are 2 critical elements that should always be highlighted; funding and cutting costs.

As a best practice, businesses should have a 6 months emergency fund to take care of operations in times of crisis. Cutting costs is, however, done to maintain positive cash flows.

Step by Step Guide to Financial Contingency Planning

A great financial contingency plan is based on extensive research and a collaborative brainstorming session. Here are the key steps you should take;

  1. Determine the critical risk areas: have a sit down with your business executive or hire business consultants and highlight scenarios that could negatively impact your operations. They should be realistic and their impact severe on your business.
  2. Categorize them based on their impact: If you can identify the first signs of trouble, then you can take swift action. Analyze the cause of each risk and highlight its indicators. Prioritize the risks based on how much threat they pose to your business and their likelihood of occurring.
  3. Highlight the possible courses of action: outline the separate strategy for each plan, highlighting what should be done if the risk you identified earlier were to occur. Be very methodical about the first course of action you’ll take to ensure operations resume and include elements such as employees’ responsibilities, communication processes, and timelines.
  4. Analyze your financial position: create a financial profile based on your current cash flows, market positioning, and average expenses. This will give you insights into the financial impact of disasters. You should also outline your funding sources and analyze your assets. Take a deeper look into your cash reserves, most profitable aspects of your business, and then make plans to reallocate resources in times of crisis, leverage your assets for credit or cut off some processes entirely.

Top Benefits of Financial Contingency Planning

Ensures Business Continuity

If any of the risks highlighted in your contingency plan occurs, you’ll have a playbook in place to ensure the minimal description of operations. For instance, if most of your revenue comes from one client and they leave, you can easily cut down processes so that the entire business is not crippled.

It’s a Great PR Tool

It’s not uncommon for rumors to spread about a business, ultimately impacting their customer retention rates or stock prices for major companies. With a contingency plan in place, you can communicate to the relevant stakeholders and use your emergency funds to maintain your market position until the rumors die off.

For instance, if a key employee resigns and your clients are worried about work quality, you can hire a qualified replacement immediately and communicate to them about it.

It Averts Panic

When crises occur, the first instinct is usually to panic. The uncertainty can be overwhelming, especially when you don’t have a clear course of action. A contingency plan highlights the next steps you should take, and once the initial fears pass, you are able to shift to recovery mode with ease. Your managers are also able to focus on restoring normal operations.

Minimizes Operational Loss

If disaster strikes, and you’re forced to shut down, your cash flows will be impacted. A financial contingency plan ensures that operations aren’t disrupted, allowing you to get back on your feet swiftly.

Reduces the Risk of Uncertainty

The best way to overcome challenges is to be prepared for them. A financial contingency plan ensures that you’re aware of the business risks that are most likely to impact your business and includes plans to avert them. This means that disasters will rarely get you off-guard and that you’ll always have backup plans.

Are You Leveraging the Benefits of Financial Contingency Planning?

Planning for failure may seem counterintuitive but is as important as planning for business success. Due to the uncertainty of the business world, you should always have a plan B. Most business plans solely focus on making profits, but what happens when disaster strikes? Will your business sustain its operations? Financial contingency planning ensures that you’re well prepared when crises occur.

Don’t leave your business success to chance. Let us help you create a financial contingency plan customized for your business. Contact us today and schedule your free consultation!

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