No matter how foolproof you think your plan is, there will always be circumstances you cannot completely avoid or prepare for. To address these, it is important to develop contingency plans.
Planning is all about looking at what you want to happen and making sure that it does. No matter how well you make your plan, there will always be issues that crop up that will take you off track and things that you need to work on to make sure that you achieve all your goals. Since a plan involves matters that have not happened yet, they also include areas where you have had to assume certain information. What if the assumptions you based your plan on never eventuate? What do you do then? What if the bank doesn’t give you a loan? What if interest rates rise too quickly? What if your factory burns down? What if …?
Contingency planning is all about asking, ‘What if?’ It’s about considering what could potentially happen and evaluating the risk of it occurring. Moreover, it’s about exploring possible consequences should the worst happen, and using this knowledge as a way of planning around such events should they occur.
Let’s look at an example. You ask the bank to lend you money to allow you to put your plan into action. Your calculations show that an interest rate of 6.5% would let you make a profit and at 7% you could still break even. What would you do if the interest rate the bank charges increases to 9%? What impact would this have and how would you work around it?
Contingencies occur all the time in business; it is the planning you do to get around the situation that is most crucial. Consider your SWOT (strengths, weaknesses, opportunities and threats) analysis and look at the weaknesses and the threats in particular. These will show you where contingencies might occur. A major new business opening up in your market is a threat which you may need to write a contingency plan around – how will you react to this situation? Add heavy promotion? Reduce prices on key lines?
Financial contingency problems can be added into your financial statements by adding relevant comments or by having a set of financial figures that reflect the lowest possible figures as well as the most likely. Your discussion and action plans within your business planning documents could also reflect this information. You might, for example, add comments to your staffing sections about certain situations and how you would react in them. You might say that if the market changes, you may need an extra two staff members to achieve your desired results and comment on the financial implications of such a situation.
Contingency planning is useful, but often, you cannot look at everything. There are so many things that could go wrong, and you need to consider: