A quick guide to contingency plans

Contingency plan

Business gurus always say that every business requires a contingency plan that anticipates all life’s little uncertainties. All too often, the listener nods sagely, partly out of boredom, partly because he does not really know what the term ‘contingency plan’ means – ‘just another piece of Management-Speak, if you ask me….’

And if such advice is being properly followed by most, how come so many businesses fall by the wayside when the going gets tough?

The answer, sadly, is that many business owners DO NOT really know how to implement contingency plans that will not only save a business from disaster but shorten the ensuing recovery time.

And contingency plans should also be about identifying and harvesting new opportunities, no matter how tough the current economic climate.

Here are a few questions to help make the point:

Question 1: What is a Contingency Plan?

Wrong answer: ‘It’s when you batten down all hatches when things go wrong’.

Right answer: ‘It details action designed to stabilise the business when the unexpected happens AND to do so in a way that facilitates future dynamic growth, even when the going is tough’.

Question 2: Why do I need a Contingency Plan?

Wrong answer: ‘I’ve already told you. It’s to survive, pure and simple’.

Right answer: ‘Any business with a well-defined, profit-focused business plan should have worked out how to get back on course via economies that enable a healthy recovery. This enables tactical investment when markets change as a result of business failures creating vacuums to be filled, or as new demands emerge’.

Question 3: Is it difficult to prepare a Contingency Plan?

Wrong answer: ‘Nah, piece of cake. All you have to do is sit down with your finance guy, run through all the budgets and cut them. Sorted – you’ll soon be right as rain’

Right answer: ‘Provided you have a business plan and your management team has ownership of it, you should be OK. But you need to apply financial restraint with great sensitivity so that you quickly restore your original equilibrium.’

Question 4: But what if I don’t have a Business Plan?

Wrong answer: ‘You don’t need one, mate! Just do what I said before and cut your budgets hard until the figures look right’.

Right answer: In the short-term, that could be a problem, but what you can do is work out a financial forecast based on reasonable working assumptions and then estimate how far off those targets you have drifted. Then you can work out with your senior management team what must be done and agree a timescale for implementation.

Once things are more settled, you can prepare a detailed Business Plan, so that you do not get caught out again’.

Question 5: Do all Contingency Plan changes have to be immediate?

Wrong answer: ‘Of course they do! Sooner the better! Just get on with it!

Right answer: A well-conceived Contingency Plan will work out what needs to be done and when. You may opt to hold back some of the more drastic cuts until it is clear that circumstances demand it.

For example, large-scale redundancies: why reduce your important skill centres without considering alternatives or before you know the full extent of the bad news? The Contingency Plan should be phased and everything worked out in advance so that each phase can be implemented professionally.

Another example: what would be the point of slashing your marketing budget just when you are about to launch a new product that could speed recovery? And what would be the sense of cutting your sales and customer services teams who will be focal to the success of that new product?

Conclusion

It is perfectly reasonable to identify non-essential costs and take them out quickly. It would be bordering reckless to rush into eliminating costs that are essential for long-term success.

And the only way you can know what they are is to develop a comprehensive strategic Business Plan.

Such a plan would carry a ‘Sensitivity Analysis’ showing the impact of certain negative developments. From there you can develop your provisional Contingency Plan for use if required.

And, just as a Business Plan needs to be reviewed regularly/annually, so does your Contingency Plan.

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