Planning for Contingencies

April 13, 2006

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No matter how carefully you plan, the likelihood of everything going exactly as you planned is small. When you made assumptions regarding the market and the capabilities of your business, you knew that those assumptions weren't precise. While your assumptions may have realistically accounted for reasonably foreseeable events, that doesn't ensure their accuracy. For example, if your business is dependent on borrowed funds and you plan to obtain and use a line of credit, you had to make some assumptions about interest rates. If you were realistic, you probably looked at a range of rates around your assumed rate to test the impact. Making alternate assumptions and planning around them is the best way to deal with events that are out of your control.

Let's say that your business plans to obtain a line of credit, and you negotiate an interest rate of prime +2 percent. You estimate that the rate you'll pay is 9 percent, but you can live with a rate as high as 12 percent. Obviously, anything below 9 percent makes it that much easier to meet your planned goals. But what happens if the rate goes to 14 percent or even 20 percent? It happened in the early 1980s, and the change happened over a relatively short period of time. What would you do?

A contingency plan is an effort to avoid having your business disrupted when market or economic conditions change beyond what you're prepared to handle without major adjustments to your business. What kinds of contingencies should you plan for? Fortunately, if you've followed along with our suggested planning methodology, you already have a list that identifies many of the most important factors. The SWOT analysis lists those internal and external factors where your risks are greatest. For example, if a major external threat is a direct competitor opening up near your location, you can plan for that eventuality. Perhaps you'll lower prices, stay open longer hours, or institute a frequent customer bonus plan.

Contingency plans can be included in your business plan in a number of ways. For example, your financial statements can incorporate a footnote explaining that the projected interest rate can go up by as much as 3 percent before your profit margin is seriously affected. Or, your discussion of how many employees you'll need can state that an additional production person will be hired when sales of $X are achieved.

Interestingly, contingencies don't always involve things going worse than expected. For example, assume that your initial marketing plan calls for a mass mailing to 1,000 prospective customers. Assume further that a primary selling point is the immediacy of the need for the customers to act. You expect to get perhaps 10 to 20 paying customers out of the mailing. Instead, you get 243. What do you do? You've sold the market on the need to act quickly, but your business isn't prepared to handle that many customers in the time frame required. If you have a contingency plan, you're ready to act. In this example, it may involve bringing in temporary help, outsourcing certain tasks, or even asking competitors to do the work on a contract basis.

Ultimately, you can only go so far in contingency planning. What is important is that you've identified those areas in which your plan is vulnerable to variable factors that can affect your business. If you have already considered possible responses to changes in the market, you can react more quickly than if you've never even thought of the consequences. Thus, whether things go better or worse than expected, you have already identified the likely causes and considered your responses.