Financial contingency planning is a must for businesses no matter what stage they are in. If you are pre launching or have been in the market recently, a contingency plan might not be the first thing on your mind. However, it is important that you think about unexpected situations that can occur because it can interrupt the launch of a new business or disrupt normal operations. If you do not have a contingency plan, the unforeseen events can be harmful to the health of your business, potentially leading to insolvency before a startup is even off the ground.
Sometimes businesses that are in the early stages, funding streams are not available so putting together a simple contingency plan can give businesses in this situation the lifeline they need.
In this article, we are going to talk about why financial contingency plans are so important and help you create your own for your early-stage business.
What Is a Financial Contingency Plan?
A financial contingency plan should document your course of action in times of crisis that threatens the stability of your company. It should focus on resource and financial allocations in particular.
It can mean the difference between the survival and failure of a business when disaster strikes, whether it is due the failure of a piece of equipment, loss of a credit line, or because of a late payment.
Why Are Financial Contingency Plans Important?
When a business is in its early stages, there no resources to absorb any unexpected events. This is why a comprehensive plan that aims to the limit the risk of any financial loss is important. Instead of panicking and being afraid, startups can implement practical and effective business strategies to remain operational and avoid insolvency.
However, note that a financial contingency plan will not protect you against every financial situation. Other issues such as problems making tax payments or issues around simply growing too fast, can also be a threat to new businesses.
How to Create a Financial Contingency Plan
To create a financial plan, follow these steps when you are getting started.
Create a list of your priority resources
Not all your business’s resources are crucial to its operation. Take a look at the resources you have and find out what you can operate without them. Perhaps you own a brick-and-mortar location and you could sell the survival of your business if it depended on it. Or do you have a business vehicle, but you can operate without it because it is not critical to have. Remember that it will be easier to think through your bottom-line essentials in the early stages of your business instead of in the middle of the crisis.
Consider the potential risks
There are some risks that could lead to your business failure. The risks are easy to foresee, even if you have yet to launch. With the right planning it is possible for any business to survive any type of risk.
Make a list of possible risks that your business can face and give some thought to how likely they are to occur and when they would occur. This is the perfect time to conduct a SWOT analysis to help you out.
For the threats you list you should have the strategies and techniques that you will use to minimize the risks. Also, detail the techniques you will use to mitigate the financial impact of the risk if it should occur.
Determine how to execute the plan
Take the information you have and determine who will be responsible for executing the financial contingency plan. As a startup business, this responsibility will fall on the owner of the business. You should also map out who is going to have the access to the documents needed to act upon the plan before during the process and include a list of the team members who will know about the plans before they are put in place.
Make sure that your plans are up to date and review them regularly. The type of risks that businesses face change at different stages of their development. The threat of late or non-payments is a leading cause of business insolvency. However, before launch, your biggest threat is more likely to be whether you can secure funding.
There can be changes to the market conditions that expose the business to new and unidentified threats. It is essential that you revisit and revise the plan on a quarterly basis as the business grows.
Identify alternative sources of credit
It is not uncommon for lenders to remove lines of credit or for trade suppliers to reduce the credit they offer your business if they are concerned about its financial stability. You need to be proactive about identifying the alternative sources of credit that can be secured.
This process should be revisited on a quarterly basis as the range of finance options available to your business will change. Do not wait until your credit line is removed because it can take a long time to find an alternative source of funding for a startup business.
Consider the capital requirements
The typical approach to contingency planning is to decide what is best for the business first and then think about where the money to implement the plan will come from. When creating the contingency plan for a startup, the profitability of accessing the capital you need is low. You should first explore the capital markets and then change your plan accordingly based on the money that will be available.
Make sure to compare cash flow projections with actuals regularly so that you can head off a crisis before it has a chance grow into something that threatens the existence of your business.
The Bottom Line
The number one priority for a startup business might not be a financial contingency plan but should be if you want your business to survive during tough times. Putting plans in place can provide reassurance and respite during any financial trouble.