What Is a Contingency Plan and Why Does Your Business Need One?

By Suzanne Kearns

4 min read

You’re humming along in your business, and suddenly — out of the blue — the unexpected happens. It could be in the form of a natural disaster, or something else, like a medical emergency for you or your most valuable employee. You could lose your entire data system to a tech glitch, or sales of your new product could flat-line.

Any of these events could prevent a business from functioning, and that’s where contingency planning can save the day. Stephen Bush, who is CEO of AEX Commercial Financing Group and has 30 years as a small-business consultant, sums it up: “Contingency planning involves asking yourself what could go wrong for every aspect of your business, and then preparing an action plan for what you will do if that happens.” Here is a four-step process you can use to prepare a contingency plan for your business.

Step 1: Identify the Key Risks

You’ll first need to identify which potential areas in your business could possibly cause problems. To do this, many business owners brainstorm with their employees, looking at all areas of operation and identifying the things that could go wrong. Bush says that might include things like the bank not agreeing to refinance your business mortgage or losing your biggest customer. Here are a few more examples:

  • Purchasing: What if your key supplier goes out of business? What if you lose your credit account with one of your major vendors?
  • Staff: How would you issue paychecks if your payroll clerk suddenly quits? What if your manager doesn’t show up for work for a day — or longer?
  • Sales: What if your top producing salesperson takes a job with your competition? What if one of your employees commits a social media gaffe and people in your community began boycotting your business?
  • Natural disasters: What if the power in your area goes out and you lose access to your data, including customer information and receipts? What if a flood, earthquake, tornado, hurricane, or other natural disaster hits?

In addition to brainstorming, Bush says it helps to have an outsider, such as your accountant or business consultant, “take a look under the hood” and provide some suggestions, because potential risks aren’t always obvious.

Step 2: Prioritize the Risks

Now that you have a list of many possible scenarios, it’s time to identify those that pose the biggest chance of causing an interruption to your business. Skills training site Mind Tools recommends doing this by assigning a ranking to each of the possible risks in two areas. First give each risk a probability ranking of 1 to 10, and then rank it in terms of the possible impact on your business. After you have ranked them all, you can use Mind Tools’ free chart to create a visual representation of how to prioritize the risks.

Step 3: Create a Contingency Plan

Once you’ve identified the scenarios that are most likely to disrupt your business operations, you’ll need to create a contingency plan for each. If your goal is to decide what you will do to resume business in case one of the disruptive scenarios takes place, you’ll need to outline a step-by-step plan for each one. Some of the key points you’ll want to consider are:

  • Timelines: When creating contingency plans, be sure to look at them from a timeline perspective. What will you need to do in the first hour after a data loss? What about the first day? The first week?
  • Communications: Decide in advance who will be in charge of communicating with everyone else for each scenario. Bush says that for small-business owners, it’s a good idea for them to assume responsibility for something this important.
  • Staff needs: Talk to each of your departments or employees and have them list exactly what they’ll need to continue operating if a given scenario occurs. Then make the necessary arrangements to provide it.
  • Reduce the risk: For example, for natural disasters, you can reduce the risk by making sure you have adequate insurance coverage. To reduce the risk of a data loss, you can store yours securely in the cloud and stay informed by signing up for free bulletins about current cyber risks from the Department of Homeland Security.

Because each risk calls for a unique contingency plan, you’ll have to devise one for each. You can get some help by using the free contingency plan template [PDF] offered by Kapnick Insurance Group. If you’re creating a plan for natural disasters, the Red Cross offers a Contingency Planning Guide [PDF] that could help.

Step 4: Maintain the Plan

Now that you’ve created contingency plans for each of your risk areas, you’ll need to ensure that they’re updated and handy if you need them. Bush says business owners should consider reviewing the plans monthly and quarterly. In addition to keeping them updated, here are some other tips to ensure that your plan will be of help should an unexpected situation arise:

  • Don’t store the plan only in digital form. If the power goes out or you lose your data, you won’t be able to access it. Keep a copy in paper format, as well.
  • Store a copy of it onsite and offsite in case something prevents you from going to the business.
  • Make sure that all employees are aware of the plan, and can access it.
  • Ensure that everyone knows their role in the plan and has the training to do their job.

According to Bush, things can go wrong, and it’s unwise for business owners to ignore the risks. By creating a good contingency plan, you’ll be prepared.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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