5 Steps to Create a Contingency Plan for Your Business
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Any business that survived the pandemic had to adjust, readjust, and rethink their business as they dealt with shutdowns, supply chain issues, and ever-changing customer behavior. At the time, it could be seen as crisis or recovery planning. However, intentionally or not, these businesses were proactively creating contingency plans.
What is a business contingency plan?
A business contingency plan is an established strategy or backup plan designed to help organizations respond to possible future events. This contingency planning process encourages you to consider business and financial strategies for potential risks well in advance. It’s basically a lean business plan that takes into account unexpected scenarios that could affect your business.
Doing so ensures that you aren’t caught off guard. Instead, when a negative event occurs, you can jump right into successfully navigating your business. A contingency plan can even address larger potential issues such as a natural disaster, a global pandemic, or a major security breach.
Your contingency plan will want to address and cover:
Financial scenarios
Financial “what if” scenarios are based on the contingency you are planning for. The important part is to include your projected Profit and Loss statements as well as your Cash Flow Forecast. Adjust these financial statements around a potential issue to better understand what course of action you’ll need to take.
Are there increased costs of goods and services or do you need to change your pricing? Should you add a fuel surcharge if the contingency involves higher gas prices?
Strategy adjustments
Understanding the financial effects is the first step. Next, you’ll need to address how you will adjust your business and marketing strategy to navigate the contingency, you are planning for. This is when you go from risk management to creating a plan that helps your business thrive rather than recover.
What changes will you need to make to your staffing, advertising, and marketing budgets? Will you need to change how you sell, market, and support your products and services to address the adverse events?
Why is a contingency plan necessary?
By putting together a contingency plan and addressing risks to your business, you will be prepared and able to best address those risks when and if they happen. The last few years have taught all small business owners that we have no idea what is ahead. That the best possible way to plan for the future is to be ready for anything.
A contingency plan for your business will help you step through the what-if scenarios that you might encounter. To start putting together solid plans that will help you overcome risks, fast-track disaster recovery, and even ensure there’s business continuity in place.
What if gas prices double, and your run a delivery business? A contingency plan could help you model the financial scenario, make sure you have the right access to credit lines to pay for the increased costs, and plan for the right gas surcharge to add to your customer deliveries.
How to create a contingency plan for your business
Writing a contingency plan doesn’t have to be a huge or stressful ordeal. All you are doing is taking your lean business plan, and making some adjustments to the strategy and the strategic forecast to plan for uncertainty. Here’s a step-by-step guide to write your own contingency plan.
1. Identify and list the risks
In the past few years, all business owners have experienced risks they never saw coming. Trying to account for everything can be overwhelming and time-consuming. Rather than anticipating anything that could happen to your business, focus on the next few years.
Start with a comprehensive list, putting everything down that could possibly happen to your business in the next 12-24 months. Loss of an employee, a dip in sales, equipment failure, rising shipping costs, insurance increases, etc. Depending on your business, it may also be beneficial to consider larger unforeseen risks such as natural disasters, cyber-attacks, and economic downturns.
We can all look back at the beginning of the pandemic and learn from the events. Use that knowledge to think about potential future risks and build your list.
2. Prioritize key risks
Now that you have all those frightening potentials listed, it’s time to prioritize. You need to think about your key risks. The ones that are most likely to happen or will cause the greatest hardship to your business. Realistically you should prioritize no more than 3-5 key risks.
Remember, you can always use these initial contingency plans to help you explore additional risks. More than likely, several risks will have similar effects on your business functions. It’s much easier to adapt your contingency plans once you have them rather than starting fresh every single time.
3. Outline contingency plans for each risk
Now that you’ve done the prep work, it’s time to jump into developing your plan. Take your prioritized list and focus on building contingency plans that outline how you and your business will tackle each risk. Here is what you should include in your contingency plan:
Financial forecasts for each risk
To truly understand how a specific risk impacts your business operations, you’ll need a full financial forecast. This will account for what the risk will do to your revenue, expenses, or both. Having a clear picture of your potential financial situation will help you answer questions such as:
- Will you have enough cash to address the risk?
- How does the risk affect your ability to collect cash, and pay your bills?
- Are there any obvious costs that you can minimize or cut?
- Do you need to consider expanding a credit line or applying for a loan?
Don’t worry about creating these forecasts from scratch. Instead, start with your current financial forecasts, make a copy, and adjust projections based on what you expect to happen. Be sure to take note of what adjustments you make. This will make it far easier to update your forecast scenarios whenever you bring in more recent real-world performance data for your business.
Looking for a better solution? Learn how you can save more time and ensure greater accuracy when adjusting to actual performance using LivePlan.
The one-page plan
With your forecasts in place, you can begin to define the actions you will take. Keep things simple and easy to follow by creating a one-page strategic plan for each risk. In it, you’ll address how the effects of each risk will impact your operations, sales, marketing, milestones, and even funding needs. This will help you answer questions such as:
- What strategies in marketing and sales have to be changed or adjusted?
- Do you have to hire new people?
- Do you need to reduce costs and expenses to survive the risk?
- What are the roles and responsibilities required to address the risk?
Document your 12-24 month road map and the key changes you need to implement to keep your business healthy. Keep it lean and actionable to ensure that you and your team will actually be able to use it when the time comes. The LivePlan Pitch page is a perfect place to outline your one-page strategy.
4. Connect them to your overall business plan
You’ve considered the risks. You have contingency plans in place that include financial forecast scenarios and a one-page action plan. It’s now time to connect your contingency plans to your overall business strategy and business plan.
Ideally, you should have a simple, lean business plan that is helping guide your business over the next 12-36 months. If not, take 30-minutes to develop one based on your current expectations for your business. This will make it far easier to update and use when facing the risks you’ve identified.
Take this business contingency plan example for instance. If your unexpected event is about a financial risk (such as a dip in sales), connect that contingency plan with your financial plan as a potential fork in the road. You can easily do this same exercise with the two to three more contingency plans you have already built out.
The end goal is to make this quick and painless so that you can spend less time planning and more time acting when a crisis you’ve planned for occurs.
Think of it like attachments for a tractor. Where you have all of the right buckets and tools to get your yard in tip-top shape. You’re prepared to jump right in and take on everything from mowing and digging to laying down new gravel. All you need to do is add the right attachments ahead of time. That’s exactly how you want your contingency plans to function with your current plan.
5. Share, review and revise
Once you have integrated the contingency plans into your overall business plan, it’s time to get your team on board. You want to be sure that they understand the ins and outs of your business plan, and how each contingency should be executed when the time comes.
So how do you get your team on board? Try these three simple steps:
- Share the plan with the contingency plans integrated into the appropriate places.
- Invite team members to a meeting where you can present the business plan, the potential unexpected events your business might have to face, and the contingency plans that outline how you navigate around them.
- Set the expectation with the team for regular, monthly review meetings. This is where you can review business health, compare actual results to the planned results and assess the need to implement a contingency plan.
You can check out our guide on how to conduct a monthly plan review meeting for a more thorough explanation of how to set up this process.
Preparation is everything
The hard work is done. You have thought about potential hurdles your business might face and you have a plan. Your team is engaged and you now have a regular review schedule in place to keep your business on track.
All you have to do now is implement your lean business plan, watch for obstacles, and be ready to use your contingency plans if needed. Don’t worry, your regular review meetings will help you track your actual results against your plan and will give you an opportunity to revise your plan if need be.
Check out how LivePlan can help simplify this process and help you make better business decisions in any scenario.
