How to Create a Contingency Plan for Financial Crises

We live in times of crisis. In just a few years, we’ve had a stock market crash, pandemic, war that changed the prices of everything, inflation, and maybe even something else very important that we can’t even remember among all of these things.

And we’ve witnessed some companies and brands, like Virgin Atlantic and Brooks Brothers, failing to continue their operations during these crises.

The only way you can stay operational during a crisis is to have a solid financial contingency plan. So, let’s check what that is and how to make it!

What is a contingency plan for financial crises?

A financial contingency plan is a playbook for unexpected events that could impact a company’s financial stability, like personal tragedies, the loss of a credit line, equipment failure, etc. 

That way, in times of crisis a company will be prepared with a certain course of action, preserving its financial stability, remaining operational, and avoiding insolvency as much as it can.  

A company typically develops contingency plans for financial crises for a half-dozen risks chosen by the management. And all of those contingency plans focus on resources and financial allocations.

Why are financial contingency plans important?

Contingency plans that cover a few unexpected risky situations can limit those risks and mean a difference between the survival and failure of a business. 

Financial contingency plans have three major advantages:

• Mitigating risk

This is the primary point of a contingency plan - to lower the impact of unexpected events, such as natural disasters, pandemics, wars, economic crises, changes in market trends, etc. A company should identify and evaluate risks and address them accordingly. 

• Ensuring business continuity

Quickly adapting to new situations is a must for business continuity, as we have witnessed during the COVID-19 crisis. Without a contingency plan, it would be very hard to answer to the disruption without downtime and revenue loss. A well-thought contingency plan together with crisis management will lead a company to maintain critical processes and systems during a crisis.

• Maintaining stakeholder trust

Building a stronger relationship with customers, employees, and investors affects a company’s reputation, and having a contingency plan contributes to that reputation massively. Showing that you have a solid plan during an uncertain time can lead to long-term loyalty and even increased investment.

7 steps to create a contingency plan for financial crises

1. Identify risks and assess them

Highlight all the major scenarios that could have a severe negative impact on your business. Whether those include personal tragedies like the death of the CEO, supply chain problems, pandemics, strikes, or something else, assess the risks and categorize them according to their impact on your business.

Analyze the cause of each risk to check if you can do something to prevent it. Prioritize the risks based on their effect on your business and how likely they’re going to happen.

2. Create a list of your priority resources

Priority resources are the ones your company couldn’t exist without. Identify them and think about what you can do with all the others. 

You should ask yourself: 

• Which assets are indispensable? 

• Which assets would you consider shuttering, selling, or outsourcing? 

• Is there something you could sell (vehicles, real estate, machines)? 

• Are there less essential members of staff you could work without?

• Where could you cut spending?

• How much can you borrow quickly? 

• Do you have a budget for unplanned expenses?

3. Create possible courses of action

Now that you know the potential risks and which processes and assets are essential to your company, you need to develop strategies to address those risks.

Make a separate strategy for each risk. The strategy to resume business processes, or contingency plan, should include a quite detailed document with employees’ responsibilities, communication processes, and timelines. That may include creating alternate supply chain plans, laying people off, diversifying your product offerings, cutting expenses on various departments, seeking additional funding sources, etc. 

Whatever solution you plan, consider the financial resources required to implement these solutions and ensure that they are feasible and sustainable.

4. Reallocate, cut, or leverage resources

Identify the human, intellectual, physical, and financial resources needed to address each risk. Then, based on your previous risk assessment, allocate the resources based on the likelihood of each event and its impact on the company.

Depending on the urgency and ability to raise funds, you’ll probably need to scale down production, get new credit, sell a non-core business unit, start using emergency funds, invest in new technologies, and/or reallocate the personnel. 

You might see your revenue growth calculations going down or being steady for some time, but contingency plans should enable you to keep working and go back to old numbers quickly.

5. Identify alternative sources of credit

It's not uncommon for lenders to remove or reduce lines of credit if they're concerned about its financial stability. 

That's why you need to regularly identify alternative sources of credit available to your company. Besides that, you should assess their financial feasibility so that you can continue with your operations even if credit lines are reduced or canceled.

Bear in mind that financial options change over time, so you need to repeat this process quarterly. Don’t wait for a financial crisis to happen to start looking for funding somewhere else, because it takes precious time.

6. Analyze the contingency plan

Economic shifts, market trends, and many other things can affect your contingency plans, so you need to review them quarterly or, at least, twice a year. Those shifts can expose your company to new and previously unidentified threats, or make earlier considered risks irrelevant at the moment.

A financial contingency plan should be a document subjected to changes, updated on a regular basis according to the changes in the business environment and the organization’s operations. This usually involves periodic risk assessments, evaluations of implemented strategies, and updates of the plan as needed. 

That way, your financial contingency plan will be up-to-date, relevant, and effective. 

7. Communicate the Plan 

Even before the crisis occurs, you need to communicate the contingency plan with your stakeholders - employees, investors, suppliers, and sometimes even customers. That way, they can review your plan, (maybe even make suggestions), understand it, and act upon it calmly if needed. 

It is essential for a contingency plan to be effective so that everyone understands their role in implementing the plan, the steps they need to take in the event of a crisis, and in which timeframe to do it.

Conclusion

We know running a business means a lot of different responsibilities and making a contingency plan may not be your priority. However, creating a financial contingency plan can ensure the longevity and sustainability of a company.

It is a safety net, that addresses risks, grows confidence among stakeholders, and ensures business continuity. Contingency plans even grow your capacity to adapt!