What is a Contingency Plan in Business?

Your small business is the manifestation of your hopes and dreams and having a contingency plan in place can protect what you’ve built. When you’re running a business, you’re creating something new in the world and anything can happen.

While the possibilities can be exciting, unforeseen events can knock down the foundation of your business, leaving it on its last legs. In the past few years, we’ve seen several possible scenarios play out. From natural disasters like hurricanes and wildfires and the COVID-19 pandemic to supply chain issues and protests, it’s clear negative events can happen at any time. A business contingency plan helps you be proactive and face potential threats head-on.

What is a Business Contingency Plan?

A business contingency plan outlines an action plan to deal with potential worst-case scenarios so you can get back to normal operations. So in the event there’s a major event that throws off your daily operations, there’s a backup plan. Contingency plans are a crucial part of corporate risk management so you have a Plan B.

For example, some small businesses shuttered due to the pandemic while others are still trying to recover. Identifying your unique business risks and creating a contingency plan can put you in control in situations out of your control.

List of Risks Your Business Could Face

Every business will have its own potential risks to consider. A retail store might worry more about the impact of natural disasters or a pandemic. An online business needs to consider cybersecurity threats, hackers, and the potential for a data breach. Here’s a list of potential threats that could derail your business.

• Earthquakes. While the risk might be low, earthquakes can pose a threat to certain businesses. If you’re in the danger zone where the next Big One could hit, having a contingency plan is key.
• Hurricanes. In Hurricane-prone areas, small businesses need to take active preparedness measures.
• Wildfires. Certain weather conditions can spur wildfires that could threaten your business.
• Floods. More historic floods are occurring that could wipe out your business.
• Pandemic. An unexpected health threat, like the COVID-19 pandemic, can disrupt business for months.
• Recession. An economic downturn or recession affects consumers’ discretionary income. When people tighten their belts, it can impact your bottom line.
• Outages. A power outage or your website being down and unable to take orders can majorly hurt your business.
• Supply chain delays. You likely rely on other businesses and products to help you run your business smoothly. Supply chain delays can affect how you run your business and execute operations.
• Cybersecurity threats. For certain businesses, cybersecurity is paramount. Consider National Public Data, a company providing background checks that had a data breach that put 2.9 billion consumers at risk. The company has since filed for bankruptcy.

This is a list of common risks that could hurt your business, but isn’t exhaustive. By the very nature of some of these unforeseen events, they’re completely unexpected and you may not even think of them.

3 Ways Contingency Plans Help Your Business

You likely have a business plan you follow to keep things on track. A contingency plan creates an alternate if things go awry, so you’re prepared for the potential impact. Here are three ways a good contingency plan can help.

1. Have a response plan. Having a course of action before something happens allows your team members to move faster and respond to the matter at hand. Crisis management is much easier to deal with when you plan ahead rather than create a plan when under the threat of a specific event. Emotions run high in times of crisis and can cloud judgment, so a plan created with a cool head can help you follow a protocol and resume business functions ASAP.
2. Save money and time. If your business is unable to function due to an event, you face losing revenue. That can be a major threat to your business financial plan, especially if you have minimal cash on hand. A contingency plan saves you both money and time. It provides a clear path on how to respond and what to do next. That way you can get back to business earning money and reduce the amount of time dealing with the event.
3. Minimize loss. Having a business contingency plan can help mitigation efforts and minimize potential loss of property, life, documents, technology, etc.

Step-by-Step Guide to Create a Business Contingency Plan

To help you prepare for possible risks that can threaten the lifeblood of your business, here’s how you can create a contingency plan.

Step 1: Evaluate Risk Factors

Start by evaluating the specific risk factors for your business. What types of events could be catastrophic? Consider National Public Data and the major data breach, affecting billions of consumers. Millions of restaurants and retail businesses had to pivot quickly to e-commerce and create an online business plan for the first time due to the pandemic. Identify the potential threats your business faces and what those worst-case scenarios might look like.

Step 2: Look at Probability and Impact

After evaluating various risk factors, look at the probability and impact of each. You don’t necessarily need a contingency plan for every potential threat. But you do need a contingency plan for things that have a high probability of occurring and/or do harm to your business that can be long-lasting.

Step 3: Do a Business Impact Analysis

According to Ready.gov, “A business impact analysis (BIA) predicts the consequences of a disruption to your business and gathers information needed to develop recovery strategies. Potential loss scenarios should be identified during a risk assessment.”

This can help you assess which events and factors could cause the most damage or loss to your business. Some things to consider include:

• What would happen if there’s damage to business-critical equipment?
• How would physical damage to your building impact your brick-and-mortar business?
• What impact would a power outage, lack of water, or internet have on your business?
• What if a natural disaster or cybersecurity threat wipes out your technology or data?
• How would a supply chain delay affect your business operations?
• What if you couldn’t get into your building/store due to weather or security issues?

Going through this step helps you evaluate how certain events would directly impact your business.

Step 4: Take Preventative Measures

As you identify potential threats and risks to your business, you can take preventative measures now. A contingency plan creates guidelines for potential future events, but there may be things you can do now to lower your risk. For example:

• Getting insurance. Depending on your business and its threats, this can mean general liability insurance and commercial flood, earthquake, or hurricane insurance.
• Security systems. Having security cameras and a security system set up can help reduce certain risks and provide crucial information.
• Backup data. Securely backup your data and information that’s critical to running your business.

Step 5: Put Contingency Strategies In Place

Once you’ve identified the biggest risks to your business and have taken what preventative measures you can, it’s time to put other contingency strategies in place. For each potential risk or event, write out a response plan.

• What needs to be done?
• In what order?
• Who is the primary point person?
• Which team members are involved?
• How much do you need to budget for your business contingency plan?
  
  

Creating a contingency plan template that answers these questions can help you make the process easier.

Step 6: Test Your Plan

Once you have a comprehensive business contingency plan, notify all staff involved. As part of the training and communication, consider running simulations and testing your plan. This can help you identify potential issues or things you haven’t thought of yet.

Step 7: Manage the Contingency Plan

You want to have everything in writing. Keep a hard copy of your plan as well as on the cloud. Inform all staff of the protocol for certain high-risk events. As new risks present themselves, go back and revise your business contingency plan so it’s up-to-date.

Final Thoughts

You’re probably so busy running your business that thinking of all of these contingencies is the last thing on your mind. While it might not be the most urgent issue you’re facing, it’s no less important. A contingency plan can build up your defenses so that you have a shot at longevity instead of crumbling under the weight of unexpected events. In that way, think of creating a contingency plan as a type of insurance and an investment in your future success.

Frequently Asked Questions (FAQs)

If you need to create a business contingency plan as part of your corporate risk management, here are some answers to frequently asked questions.

What are Some Contingency Plan Examples?

An example of a contingency plan is a retail business preparing for a pandemic or natural disaster. Without the possibility of foot traffic, a contingency plan would be to move sales online and provide shipping and delivery to help business continuity.

What Happens If You Don't Have A Contingency Plan?

If you don’t have a contingency plan in place, you’re vulnerable to a number of risk factors that could negatively impact your business. This could shut down your business for longer than needed or end up costing you more than it would if you had a plan.

What Are The Disadvantages Of A Contingency Plan?

A contingency plan is a safeguard for your business, but there are some disadvantages. Namely, a business contingency plan takes time, money, and effort and can take away from your current needs. Also, no matter how much you plan you can’t prepare for every possible risk.

What Should You Consider with an Online Business Plan and Contingencies?

If you have an online business plan and all or the majority of your business runs on the web, there are several things to consider when contingency planning. Think about what would happen if your web hosting was down, a hacker accessed your website, or if there was a data breach.

Why Do Businesses Need A Contingency Plan?

Businesses of all sizes need a contingency plan to insulate themselves from potential threats. A range of events or activities can disrupt business as usual. To ensure you can keep up with your business financial plan business financial plan and earn revenue, a contingency plan is key.

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