What is a Contingency Plan in Business?

On the heels of the COVID-19 pandemic, business owners are looking back on their responses and evaluating their businesses’ performances. The large and devastating effects of the pandemic challenged small businesses and their ability to survive during the pandemic. Many small business owners were left without a clear plan or strategy for how to shift their business strategy to operate during the pandemic. While some eventually adapted, others went out of business. You may be wondering if a contingency plan would have been able to help some of those businesses that had a harder time adjusting to the pandemic.

Indeed, the COVID-19 pandemic was a large, unforeseen event. In recent times, society has not dealt with a pandemic. Yet, these are not the only external challenges for small businesses. If your small business is located in Florida, for example, your business might deal with hurricanes. If your business is located in California, you might have to have a plan in the event of a wildfire or earthquake. In the Midwest, your small business might be concerned about the risk of tornados. Certainly, natural disasters pose a threat to the everyday operations of your business. Having a contingency plan may be able to help you deal with unexpected events.

Your business operations are not just affected by external events related to weather, pandemics, or various wider negative events. Your business is also affected by events that occur during your normal operations. For example, you might have a piece of critical equipment break at your coffee shop, preventing you from producing your popular cappuccinos. You may need to be prepared to deal with this issue in the short term as well as the longer term. At the same time, one of your best employees might leave when your business has only a few employees. You may be scrambling to find team members to help fill the gap in business functions and avoid a worst-case scenario.

As you might be able to see, there are a lot of reasons that a contingency plan might be able to help your small business. It can help you streamline responses to different issues and help your small business preparedness. While you might recognize this, you might also be wondering how to create an effective contingency plan to reduce potential risks to your business.

There is no need to worry. You have come to the right place! In this post, we will review what a contingency plan means, why you need one, the events that create a need for contingency plans, how to make one, and how to incorporate your contingency plan into your business plan. We’ll cover the following topics in detail in this article:

What is a Contingency Plan in Business?

Before getting deep into the weeds of a contingency plan, it would benefit you to have a clear understanding of a business contingency plan and exactly what it means. In doing so, you can more efficiently form your plans and more effectively plan and prioritize your resources, responses, and time.

A contingency plan is, at its most basic level, a Plan B for business operations in an unforeseen scenario. A contingency identifies some event that will affect its operations, outlines its risk and proposes measures for risk management, and offers a backup plan in terms of the responses from the employees of a business as well as the leadership of the business.

A contingency plan is different from a business continuity plan in that a business continuity plan deals with a more severe scenario. In a business continuity plan, the existence of a business is threatened to its core, and there is typically an emergency that comes alongside it. A business continuity plan will not only take into account a course of action for continuing the business operation in light of the emergency but also come with a plan for the safety of stakeholders in the business, such as the business’s employees.

While business continuity plans warrant their own consideration, planning, and incorporation of them into your small business, we will focus more on contingency plans due to the more widespread and relevant nature of contingency plans to small businesses. Plus, many of the same strategies involved in the construction and execution of plans can also be implemented for continuity plans in the same way that contingency plans can be made.

Why does a Business Need a Contingency Plan?

As a small business owner who is likely already constrained by time and resources, you may be wondering why your small business needs a contingency plan. After all, you might have had success up until this point. You may have even successfully dealt with challenges in the past and made it through them with your small business.

These concerns make sense, but they do not diminish the importance of the contingency plan. Although having survived previous issues that challenged your small business, your small business will always be exposed to possible risks and potential threats. These risks and threats might be greater for certain types of risks or events which may not have occurred in the past. Examples of these might be natural disasters, a recession, an employee strike, a lawsuit, or supply chain disruption.

Usually, when such a large and consequential event happens, your business will need to be able to respond to the potential impact in time to be able to reduce the potential effects on your business. Having a good disaster recovery plan or emergency response protocol can help your small business achieve a good mitigation strategy for an event. This can help reduce the impact on your business’s operations.

The most serious threat is not merely toward business processes but to your business itself. In certain cases, an event may be enough to put your business out of business. This is because your small business might be obligated to pay certain costs like a mortgage, rent, utilities, your employees’ salaries, or more. If your business is limited in cash or has low cash flow, you might have additional problems when it comes to responding to an unforeseen event. These consequences can create a domino effect which quickly reduces your ability to earn revenue and, thus, pay your bills.

While your business might go out of business due to certain events, a plan might help you manage key risks. A timely or planned response may be enough to make all the difference.

In any case, there are many potential threats to your business that could disrupt your business operations. By planning early and not deciding to plan as you go, you may be able to utilize recovery strategies that help your business preemptively tackle various issues at hand.

In total, developing a good crisis management plan through contingency plans can help your business maintain profitability or reduce the effects on profitability of an unforeseen event or crisis.

Events Necessitating a Contingency Plan

Part of creating a good contingency plan is anticipating the potential events that can affect your business and its operations. There are some general categories of events that necessitate having a contingency plan, including natural disasters, equipment issues, security issues, and market conditions.

Some natural disasters may be on a smaller scale. A problem that might be a natural or accidental occurrence on a smaller scale is a fire. Fires occasionally happen to businesses, and this can disrupt their operations and damage their facility. Fires have the potential to destroy inventory, damage equipment, and damage your facility. While you might have insurance, you may need to have a contingency plan in place to help protect yourself from the operational impact of a fire on your business.

There is a similar idea with snowstorms, for example. Heavy snow may make roads and other infrastructure impassable. As a result, you may not be able to open your small business shop or restaurant for a couple of days. This operational impairment may prevent you from being able to collect enough revenue to pay your debts or rent for your small business. By having an action plan ahead of time, you may be able to mitigate these problems as they occur.

The second category of general problems which necessitate contingency plans for your business is equipment issues. One of the examples of this could be an electrical problem if a transformer has some serious issues which affect the supply of electricity to your small business. This could similarly cause your business to have to close its doors for a while while the electricity is being repaired. Your business will still be liable for paying normal bills even though you may not have revenue being brought in to compensate for this.

You may also have to deal with a machine or piece of equipment breaking down, which is more or less critical to the operations of your small business. An example of this might be in a construction business, where you may have a single crane. Your crane might break down, and there may be no way to get another crane until your crane gets repaired. Your construction project might get delayed, and you will have to continue paying the bills while you might not necessarily be compensated. In any case, you risk damaging the relationship with your client. Having a contingency plan in this case to replace the crane could benefit your small business.

Security problems are another category of issues that would warrant a contingency planning process for your small business. One contingency plan example could be having an answer to potential damage to your business from theft. If there is theft, the windows to your business may be broken, or you may have property taken from your business. This may create safety hazards that your business needs to fix before you can invite customers back to your business. Or, you may have equipment that was stolen which was integral to the operations of your small business. To prevent catastrophic consequences, having a contingency plan could greatly help your small business.

Another example of a security problem is a data breach. If you have a startup or online business that stores the data of its customers, you could become vulnerable to a data breach. Hackers could threaten the security of this information or ransom you. You should be prepared to think about how you will respond and also think about preemptive steps that you can take to prevent this from happening in the first place.

The last category of events that might motivate you to seek a contingency plan would be planning your small business’s responses to market conditions. One of these economic conditions would be a market recession. In a recession, consumer spending usually declines. This means that businesses experience downward pressure on their revenues, which in turn makes their previous operations harder and more costly to sustain. Since making changes can help avoid problems with profitability in the future, having a contingency plan for a quick response may be very helpful.

A final example of market conditions where contingency plans might be able to help is a change in regulation. You may have a small beer brewery business that is affected by alcohol regulations in terms of serving alcohol on the same site as where you make it. If these regulations affect the operation of your business, you might want to have a contingency plan to relocate the beer-tasting part of your business to a different location. That way, you can continue to make money.

Making a Contingency Plan for Your Business

As you can see in the importance of a contingency plan and the events that might warrant its creation, making a contingency plan for your business is important. At the same time, you might wonder how you can make the right contingency plan. In doing so, you may be interested in optimizing the time that you spend on your contingency plan while allowing yourself enough time to plan effectively in the case of an unexpected emergency.

In any case, we will review the steps you can take to make a great contingency plan for your business.

Identify Potential Events and Impacts

The first step in making a contingency plan is to think about the potential events that you need to make a contingency plan for. In the previous section, we discussed what kinds of general categories there are of events that would warrant having a contingency plan for. These include natural disasters, equipment issues, security problems, and market conditions.

The best place to start in your contingency plan is to assess which of these general categories is most likely to affect the operations of your business. You may have lived in an area and run your business for a while. As a result, you may be familiar with the weather patterns and climate of your area. As such, you may be able to anticipate if there are going to be any adverse weather events that are likely to impact your business operations. This might include wildfires, hurricanes, earthquakes, tornados, or snowstorms.

If your small business has a lot of heavy equipment or depends on the use of equipment for its operations, you may be more susceptible to equipment-related issues in the event of malfunctions or equipment breakdowns. You should consider making contingency plans in these cases.

Your business may or may not be located in a city environment or in a place where you are more likely to experience theft or social unrest. If this is the case, you may want to consider contingency plans in the event of these problems. If your business is located in a small town and does not typically experience these issues, making a contingency plan for them does not need to be a priority.

Your small business is almost certainly likely to be influenced by market conditions. Recessions or other forms of market problems will very likely impact your business in some way. However, your business may be more or less prone to fluctuations in consumer spending according to market conditions. As such, you should evaluate if your business is particularly susceptible to market conditions and consider making contingency plans accordingly.

As you determine the categories of events that your business operations are most likely to be affected by, you should think of examples of these types of events. By thinking of examples of adverse effects, you can start to make contingency plans for these. Based on your current experience of running your business, you can usually have a good general idea of the problems that may arise in the future. As such, you can make a list of events that your business may need to respond to.

Alongside each of these events, you need to anticipate how they will affect your business. As a template, start making a list of each event that you need to make a contingency plan for. Then, next to it, describe in detail how it will affect your business. This should include information on how it will affect your business operations as well as your business profitability. You want to be thorough in this description so that it is clear to anyone who reads it what the problems for your business might be.

Doing this risk assessment and business impact analysis can make it easier to streamline your responses in the event of an unforeseen impact from all stakeholders. For example, if your business has a fire, you will need to identify the direct potential impacts on inventory, equipment, and your facility. You will then need to estimate the potential impact on your income and the amount of time it would take to recover. Likewise, if your business becomes the victim of theft, you need to anticipate what might be stolen and the value of those items. You should think about whether those items are critical to the operation of your business and what the impact, if any, will be on your operations and profitability.

Plan Your Responses

The next step in building your contingency plan is brainstorming your responses to the events and impacts that you listed in the previous stage. This includes direct responses in the aftermath of the event as well as planning if the event occurs.

In the example of a fire affecting your business, you may need to close for a while. Some of your direct responses might include notifying your customers or canceling existing appointments. You will also need to document the fire and the impact of the fire on your business, including filing for insurance claims if relevant. You may need to change your employees’ schedules and seek funding to help your business get back on track. If you have a rainy day fund for your business, you may need to use it to keep your business afloat. In any case, these direct responses can help your business be more organized in the event of a fire. By doing so, you can coordinate with your employees, customers, and other stakeholders to get the outcomes that you need. It can also help you make alternative arrangements quickly and in an organized manner.

In the event of theft, you can make a list of direct responses to this event to help you coordinate a response. Once you realize the theft, you might document it by taking pictures of evidence of broken glass, missing inventory, or other traces of a thief. You might then file an insurance claim and make a police report. You may also need to make new inventory orders for stolen inventory or replace stolen equipment. You may need to clean up broken glass and create a makeshift solution, so customers are not hurt if they come into your small business. Writing out these steps and responses can help make responding easier if it occurs. These direct responses help to simplify a response and coordinate it to be able to fix your business operations as best as possible.

In addition to planning your direct responses to events, you may also consider preemptive steps you can take in your contingency plan to help make a response better in the event of one of the events occurring. You can include this in the section on planning your responses. These proactive steps can greatly help your business.

In the case of both property damage from a fire or property loss from theft, having insurance is one type of proactive action that your business can take to help protect itself. For both fires and theft, installing a security system complete with fire monitoring can help you detect and deal with problems at the moment, which may end up reducing the impact on your business. In either case, thinking of potential ways you can take action today to help protect yourself can be a valuable part of your contingency plan analysis.

Establish Responsibility for Your Responses

As the next step in your contingency plan, you need to plan who is responsible for executing the direct and proactive actions in your contingency plan. In the case of a fire or theft, the first employee on site might be responsible for executing the contingency plan. That may be the case until a manager arrives. You can include a sort of chain of command in this contingency plan and share it with your employees so that they can better understand and prepare for their responsibilities in the event of an unforeseen emergency.

For proactive actions, you might give yourself the responsibility of seeing affordable options to invest in ways to mitigate the future impacts of a given list of risks to your business. You can record this in your plan so that you can reference your responsibilities in preparing and readying your business for unfortunate events.

Divert Funds for Your Contingency Plan

The final step of your contingency plan is being prepared to implement your plan. If you have established proactive actions which could help your business prepare for unforeseen events, you should execute those actions and divert the necessary funds to make them happen. Whether you are buying insurance, installing a security system, or making a rainy day fund, diverting funds is an important part of preparing to implement a contingency plan. It can provide your business with added flexibility in the event of an emergency.

Adding Your Contingency Plan to Your Business Plan

Now that you have created your contingency plan, your business is much better prepared for the unexpected. You can relax with good peace of mind that your business is in a better place to respond to unfortunate events as they arise.

Since you have completed your contingency plan, you should add your plan to your business plan. This can help serve as your central guide for responding to events as they arise, much as your usual strategies and market research in your business plan already provide. Make sure to share your contingency plan with your employees and all stakeholders who need to know of your plan. That is it! Congratulations on improving the preparedness of your small business.

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