How to Create A Strong Financial Contingency Plan For Your Business

How-to-Create-Strong-Financial-Contingency-Plan-For-Your-Business

The arrival of COVID-19 and all the disruption it has caused has left many businesses in serious financial trouble. But while your business may be struggling right now, it’s also a warning about how important it is to have a strong financial contingency plan in place for potential future problems.

There are many things that can go wrong and have a big impact on your business, even putting its entire survival at risk. You hope none of them will happen, but a contingency plan can help you do your best to prepare.

So how should you create one?

What Is a Financial Contingency Plan?

A financial contingency plan is a way to prepare for the unexpected so that you are more prepared to deal with a situation when something goes wrong. This could be as a result of an emergency, a financial crisis – or even a pandemic.

It involves preparing a list of scenarios that would have a serious impact on your business, along with a set of steps to follow in the event that one of them occurs. It can also involve changing the way you do certain things to ensure you are better prepared (e.g. putting aside funds to deal with an unexpected situation).

In short, it is all about preparing in advance for anything that might happen, with a strong focus on allocating resources and finances.

You need a financial contingency plan because no one can tell the future. If something were to go drastically wrong, it could put at risk the very survival of your company. A contingency plan helps to reduce financial loss, deal better with a situation when it occurs, reduce panic when a problem arises, and reduce your chances of going out of business.

Steps to Creating a Financial Contingency Plan

It’s well worth coming up with a financial contingency plan now rather than waiting for something to go wrong. Here are the main stages to follow to create a solid plan for your business.

Plan for the Most Likely Risks

Think about the risks that your business faces – the things that you cannot do without and that are crucial to the operation of your business.

For example, do you rely heavily on a particular customer or client? What would happen if they stopped ordering from you? What would you do if a crucial member of staff on your team suddenly left?

Other potential risks include:

  • Cyber attacks like those resulting from scam emails
  • A sudden economic downturn
  • Flood, fire or storm damage
  • Equipment failure
  • Suppliers going out of business

Basically, think of any events that would prevent you from running your business normally. Put a focus on the most likely risks, but also consider risks that would go in the unlikely-but-serious category.

List Your Resources

Make sure you have a list of your main resources that are critical to your activity. It could be a vehicle you rely on to carry out deliveries, without which you could not operate. It might be IT systems or valuable assets.

Do you have other resources that are not critical? You could list these too because you might be able to sell them in times of financial need.

Also, are there less critical staff who you could let go in the event of a disaster? Think about what is essential for your business with a clear head – don’t wait for disaster to strike when it will be much more difficult to make decisions.

Decide on Appropriate Steps

Run through the scenarios you have listed and come up with a plan for what you would do in each situation. Start with the most serious scenarios, the ones that would have a big impact, and go down from there.

How would you get back to running normally? What would be the process? Would it even be possible?

List the actions your employees should take, how you would communicate, and plan timelines so you know what has to happen and how soon.

Could you purchase insurance that reduces the risk? You may find that there are insurance products that can protect your earnings and help you to get through the most serious problems.

Asset diversification could be another solution. Or you could set aside cash reserves to ensure you have enough to deal with disasters. You could also open credit lines so you can get access to borrowing when you need it.

Part of your plan should involve delegating responsibilities. Who will be responsible for what in different situations?

List the organisations and people to contact following a serious incident, include names and contact details. This could be your staff, but it might also be your bank, suppliers and insurance companies.

Speak to your accountant. They know your business’s situation better than anyone, and they can help you by providing business planning services and suggesting strategies and tactics to help you prepare for the worst.

Review Your Plan Regularly

Once you have got a financial contingency plan in place, make sure you review it regularly. Situations change, and your business will change too. Some potential risks may arise that are a lot more serious. Keep your plan up to date so you are always prepared.

Plan for the Unexpected

No one knows what the future holds. You may have great plans for your business to grow and enjoy success but, as we’ve all seen recently, things can and do go wrong – sometimes dramatically so.

A financial contingency plan can help you to ensure your business is prepared for different scenarios should they arise. While you may not be able to prevent them from happening, you can make sure you are prepared, and it can improve your chances of getting through the problem.

At Plummer Parsons, we can assist you with business planning and corporate recovery if you are already facing difficulties. Talk to us today and find out how we can help you with any aspect of your business accounting needs.