How to Create a Business Contingency Plan

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As a business owner, you always need to be prepared for the possibility of a worst-case scenario. Risks are unavoidable in business, after all, whether they take the guise of an economic, legal, environmental, or social threat.

Therefore, it's wise to have a business contingency plan in place. If something should go wrong, you need to be able to respond quickly and keep your company's head above water while trying to identify a long-term solution. Indeed, this is the process of contingency planning in a nutshell: preparing a 'plan B' (or even several 'plan B's) that you can switch to when 'plan A' is no longer viable. 

Contingency Plans are More Important for Small Enterprises

Given their assets and resources, multinational corporations (MNCs) are, unsurprisingly, a lot more durable than smaller enterprises. In times of financial trouble, these organisations can obtain capital injections from multiple sources, or even access cash from their own emergency funds.

Take the example of Apple, for instance, who possess over $210bn in cash reserves. Even if their keynote products are a total failure at market, the company is more than capable of weathering any storm. If the same thing happened to a small business or startup, though, things would quickly go south, with bankruptcy or insolvency likely outcomes. This is because small companies simply do not have the deep cash reserves to survive such contingencies.

Unfortunately, many business owners overlook this. Indeed, contingency planning is often associated with major disasters or unlikely events and deemed too remote to worry about. But this regularly proves not to be the case. Contingency plans are intended to cover common occurrences, such as the loss of a credit line, death or injury to owners (or essential members in the organisation), or the loss of major clients, all of which are very real possibilities in business. 

Therefore, having a contingency plan in place can improve your firm's chances of survival when faced with such unforeseen events. The best part is that it is not even a complicated or resource-intensive process, either.

Here are the main steps involved in the creation of a contingency plan for any business:

1. List Your Vital Assets

The very first thing that you need to ask yourself when making a contingency plan is: what are the things that are most important for the continued survival of my business? Make a prioritised list of all the critical assets you would need to protect in the event of a contingency. 

These can include your stock inventory, any machinery or equipment, IT assets, data, essential staff members, or key clients – virtually anything on which your business could not function without. By compiling such a list in order of importance, you can then make quick decisions in crunch situations.

If you are struggling to complete this list, then consider the following hypothetical situations. If you had to lay off some of your employees suddenly, whom would you avoid firing? Alternatively, if your production capacity was affected, and you could only honour one of your clients' contracts, which one would you select? You can even narrow it down to a more binary set of choices. For instance, if there was a fire in your office, what would you try to save first? 

2. Identify Risks to These Assets

There are many external (and internal) developments that can cause harm to your business, and it is important to identify where these threats might emanate from. While creating contingency plans for every single one of these is unrealistic, you can still create a quick shortlist of some of the most pressing risks.

This is the point at which you should consult with subordinates, SMEs and other key stakeholders in the business. With their input, you can then perform a SWOT analysis and a PESTLE analysis of your organisation in order to prioritise the most significant risks.

While MNCs usually hire independent experts for this purpose, an in-house audit performed by you and your senior managers will often suffice for a smaller operation.

3. Prioritise the Risks 

As alluded to, you cannot create contingency plans for all the threats that you have uncovered. Therefore, it's far more realistic to create a shortlist of the most pressing threats, instead. For a small business, finances are usually an Achilles Heel. 

Start with any potential situations that could directly affect your firm's financial health, especially in vital areas such as cash flow, overhead costs, and other expenses. These threats could be anything, from a lawsuit to a client defaulting on large payments, to a massive rise in raw material costs. If it's likely to affect your bottom line, then you need to plan for it.

Don't just focus on your finances, though. Another common risk that is often prioritised by businesses is the threat of damage to material assets. 

For instance, is your business located in an area that is vulnerable to flooding, hurricanes, or other natural disasters? If so, then consider what you could do to minimise asset loss within your organisation. This could involve floodproofing your premises, creating secure storage locations, and of course, reviewing your insurance policies – all proactive measures that could save you a lot of trouble further down the line. 

4. Draft a Contingency Plan   

Once you have prioritised and shortlisted the main threats to your business, it is time to craft contingency plans for each of them. Generally, there are several key segments found in all contingency plans.

Most risks start with some form of trigger event, such as a sudden unexpected incident that has a negative impact on your business. Therefore, you need to outline a broad response to these triggers, which can involve multiple steps – each with their own deadlines and specific outcomes. 

Time is a critical factor in these plans, too. Essentially, you are creating a timeline that your business will adhere to should an adverse situation arise. To this end, you need to assign specific roles to various staff members and outline what they should be doing during each phase of the plan. 

You can also create specific assets or resources in advance and incorporate them into these plans. For instance, investing in different types of insurance, such as extra inventory insurance or property insurance as part of a contingency plan is a sensible idea, as is keeping aside cash reserves for an emergency fund. These can then act as a budget of sorts for your response.

5. Manage the Contingency Plan

Plans that only exist on paper are worthless in business. You need to do more if you want your organisation to benefit fully from your contingency planning initiatives. This requires the effort of all your employees, partners, and other stakeholders in the business. 

All of these individuals should be updated on the current status of your plans; it's also a good idea to maintain a core team of trusted employees who are kept in the loop regarding any changes.

If your company is large enough, you might also want to elevate some staff members to the role of team leaders or coordinators for specific plans. Alternatively, if your payroll is relatively small, then you can take this nodal role.

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Fortunately, contingency plans for small businesses are often far less complicated than their MNC counterparts. Since you have fewer resources and employees, you can keep the focus relatively narrow on the finances and assets of your organisation. 

Either way, this is an area where you really cannot afford to delegate your responsibilities or functions. After all, when your organisation sails into choppy seas, it is your responsibility to navigate and guide it back to a safer – and more sustainable – footing.

What else should a good business contingency plan contain? Let us know your thoughts and ideas in the comment section below.