An Entrepreneur’s Guide to Designing a Business Contingency Plan

Published on Nov 10, 2020 | Small Business

The reality of running a business is that you don’t have control of the future. It’s important for entrepreneurs to have a business contingency plan in place for when unforeseen challenges arise.

No matter what size a company is, it should have a proactive contingency plan in place tailored to address various potential threats – be it a natural disaster, an economic downturn, a global pandemic, or a breach in the company’s secure network, to name a few. Such plans will help to minimize the losses the company incurs as a result of said threats.

If you’re a small business owner looking to craft a solid contingency plan for your company, this article will outline what you need to know about the process.

What is a Contingency Plan?

A contingency plan is a document or roadmap that outlines the instructions or steps a company’s management has to take to mitigate the risk it’s facing from a catastrophic business event. Its purpose is to ensure the protection of the business’ resources, minimize the effects that its staff and customers may experience from the event, and make sure that the business is able to return to its normal operations as soon as possible. Essentially, it’s a list of both standard system disruptions and worst-case scenarios, and a guide to overcoming each challenge.

Related: 20 Management Tips that will Bring Success to Your Small Business

Companies primarily use contingency plans to address negative events or circumstances, such as theft, data breach, or network failures. However, a business could also craft a contingency plan aimed at positive events such as rapid company growth. The purpose here would be to ensure the company has the right resources to cater to a sudden increase in the demand for its product or services, and mitigate the risk associated with such rapid growth – cash flow gaps, staff shortage, etc.

What are the Benefits of Contingency Planning?

Contingency planning helps ensure that a company is able to respond quickly to counteract the damaging impact of any potential business dangers. Here are the three biggest benefits of having a contingency plan in place:

Promotes Immediate Action to Avoid Panic

When a company faces significant external or internal risks, not having a plan of action in place could lead to panic. A contingency plan outlines the instructions that staff and team leaders need to follow in such events to avoid confusion and a sharp decline in productivity.  It allows for clarity and informed decision making that will hopefully help solve the problem or issue at hand as quickly and calmly as possible. In the event that losses do occur, a contingency plan can provide actionable steps to begin recovering those losses.

Maintains Business Reputation

Transparency is key when running a business. It allows companies to build and maintain trust from their clients and, in some cases, investors. A contingency plan is put in place to take action when unforeseen issues, challenges, or risks occur. These types of things, while out of a business’s control, could potentially cause damage to a company’s reputation if not managed and handled well.  Having a clear and transparent plan in place to combat them is the best way to protect that client’s trust and, in turn, the company’s reputation.

Suppose your business handles sensitive information like medical or financial records, and there is a data breach. This could very well damage your customer’s trust in your company. With a solid contingency plan in place, however, you can show clients and investors that the company is prepared to fix the problem in a clear way that keeps their information protected. This strengthens that trust and preserves brand reputation.

Helps Businesses to Keep Operating

Certain challenges could leave a business vulnerable to operating disruptions. For instance, if a natural disaster causes damage to equipment or a significant cash flow issue renders the business unable to keep up with its payables. A contingency plan proactively outlines the necessary steps the company can and will take to prevent said issues from interrupting operations so the business can maintain the quality of its products or services.

For example, a disaster recovery plan may include a solution wherein you can obtain back-up equipment to replace the damaged equipment. A cash flow alleviation plan may include resources like a credit line that would provide you with the cash needed to pay for your business’ day-to-day expenses, despite the cash flow shortage. Laying out your plan before the situation actually happens will make it easier for you to manage your business and maintain normal business operations in the event that it does happen.

Improves Chances of Business Financing Approval

Banks and other lending institutions will consider your business’ contingency plan when reviewing an application for business financing. A good contingency plan puts you in a stronger place when trying to apply for business loans. The better and more comprehensive your contingency plans are, the less risk your company presents in the eyes of the lenders.

Related: Top 10 Financing Choices to Raise Capital for Your Startup

How to Design a Contingency Plan for Your Small Business

The business world is anything but stable. That is why every entrepreneur, no matter the shape and size of their business, must be proactive regarding possible threats and disasters.

The secret to a solid contingency plan is proper planning. While the thought of long hours brainstorming possible solutions with your staff might seem daunting, it’s a valuable task you need undertake to ensure that your business is protected in the face of potential threats. To make the process easier, here is a step-by-step guide on how you can craft different business contingency plans for your company:

1. Build a Contingency Planning Team

The first step to efficient and proper contingency planning is to ensure that you have the right team members on board. Each individual should have a specific role in both the planning and the implementation of plans in the event that a certain threat does occur. Roles and responsibilities could include:

    • Team leader – oversees the entire planning process
    • Department liaison – collects the input from various department heads
    • Risk management – identifies, prioritizes, and evaluates different risks
    • Implementation management – directing the implementation of various plans and their effectiveness
    • Plan distribution – ensuring that all key personnel obtain all plans
    • Plan maintenance – reviewing and updating plans as needed

2. Identify the Possible Risks in Your Business

Once you have the team together, the next step is to identify the possible risks your company might face in the future. Conduct a meeting with the team and brainstorm possible scenarios. Examples of potential risks that your company may face include:

    • Sudden machine breakdown
    • Employee shortage
    • Theft
    • Decreased sales
    • Damages from natural disasters
    • Cash flow gaps
    • Economic downturn
    • Data breach
    • Customer service issues that could affect the reputation of your business
    • Legal matters (i.e., customers filing a complaint because of an accident that happened within your establishment).
    • System issues with your business’ website

It’s always better to over-prepare in terms of the potential risks to evaluate and address in your plan. Hopefully, your business won’t endure any of them, but in the event that it does, you’ll be glad you have a plan in place. To make sure your list of possible risks is thorough and comprehensive, evaluate your business operations, and ask the following questions:

    • What could go wrong in this area?
    • What are the chances of it happening?
    • To what extent will the problem affect the company?
    • What are the possible solutions to mitigate risks and losses?
    • Is it possible to prevent this problem from happening? If so, how?

3. Prioritize the Problems

After identifying and assessing the different risks in your plan, the next step is to prioritize them according to their impact on your business and the likelihood of them actually happening. The higher the probability of a risk occurring, and the more significant its potential effect on your business, the higher its priority.

When weighing each risk, you can use a scoring system. Problems that are least likely to occur and would have the least impact on your business receive the lowest score. The problems that have the highest probability of happening and would have the biggest impact on your business receive the highest score.

4. Create a Draft for Each of Your Contingency Plans

Within your larger contingency plan are individual plans for each specific risk or threat you identify. Work with your team to lay out the plan for how you will manage and handle each individual situation. Be sure to consider the resources available at your disposal to solve that specific problem. Be as detailed as possible when outlining the step-by-step process of resolving the crisis. The more specific and organized your plans are, the more you can ensure that key personnel won’t miss any points or misunderstand the plan in the event it needs to be implemented.

Remember that this is a living document that should be amended as necessary. As you move forward, revisit your strategies and make improvements as needed.

5. Distribute and Share the Plans

After the board reviews and finalizes the plan, the next step is distributing it throughout the company. Each of the key personnel in the contingency planning team and the company’s relevant employees should have a copy of it.

In addition to saving the contingency documents to the company’s digital database so its easily accessible at any time, all staff should be given a physical copy as well. This ensures that you’ll still get to access your plans remotely should a failure in your company’s network system happen.

6. Review and Revisit Your Plans Periodically

Be sure to go over your contingency plans every so often to make sure they are up to date. Changes happen all the time in business, and some could have a significant impact on your contingency planning. New technologies, the addition of employees, and an increase or decrease in company resources may occur and you need to make sure that your plans are updated to factor in and reflect these changes.

Revisiting your business contingency plans now and then reminds the stakeholders of the role they will be playing in the implementation of their program. Periodic reviews of your strategies will also help you identify new risks your company might face and help you prepare for them in the future.

 

Creating a Business Contingency Plan is the Key to Business Survival

Risk management planning is a crucial step to take when planning for your business’s survival and success. A business contingency plan could be your saving grace when a crisis threatens the stability of your company.

Make sure you have a competent and qualified contingency planning team when planning for contingency strategies. Create individual plans for each threat you identify. As you move forward with your operations, you’ll be assured knowing that your company is prepared to face whatever problems come your way.

 

ABOUT AUTHOR

Dane Author SMB Compass
Dane Panes
Dane Panes started freelance writing in 2017. Since then, she has written about a lot of topics for different businesses. She started writing for SMB Compass in March 2020 and has been a full-time content writer ever since. Now, she focuses mostly on topics related to entrepreneurship and business financing.

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