How to Create a Financial Contingency Plan for Your Business
How to Create a Financial Contingency. Financial contingency planning is a prerequisite. Not only for established small businesses, but also for businesses in the earliest stages of education.
If you are a pre-launch or just recently entered the market. A contingency plan is likely to be the last one on your mind. After all, your efforts are aimed at making your business successful. And you don’t have to think about what could go wrong.
But unforeseen situations can interrupt the launch of a business and disrupt normal operations. Without a financial contingency plan, these unforeseen events can harm the health of the business, potentially leading to insolvency before starting work even from the ground.
Working for a professional turnkey firm, I provide expertise in terms of business recovery, cash flow and financing. I usually see completely viable startups that simply cannot function due to lack of cash flow. For businesses in the very early stages, funding streams are often unavailable, giving them little choice but to fold. Implementing a simple financial contingency plan can lead to businesses needing a life path in this situation.
In this article, we’ll look at why financial contingency plans are so important and help you create your own for your business early on.
What is a financial contingency plan? (How to Create a Financial Contingency )
A financial contingency plan should document your course of action during a crisis that threatens the stability of your company. He should focus on resources and financial allocations in particular.
This can mean the difference between surviving and failing a business when a disaster strikes, be it a late payment crisis, loss of a line of credit, or equipment failure.
Why are financial contingency plans so important? ( How to Create a Financial Contingency )
Earlier this year, 5,593 businesses were on the brink of insolvency in the UK. Many of these businesses would be perfectly viable, but they just suffer from financial management issues. For example, they may generate income but have lowered margins or have problems with chronic late payments due to the lack of an effective collection procedure.
In the early stages of a business, there are often not enough resources to absorb any unexpected negative events. This is why a comprehensive plan that aims to limit the risk of financial loss can be invaluable. Instead of panicking and fearing the worst, startups can implement practical and effective business strategies to stay operational and avoid insolvency.
As an aside, a financial contingency plan cannot protect you from every financial situation. Other problems, such as problems with tax payments or problems growing too quickly, can also threaten to disrupt new businesses. If you are looking for more information on this subject, head over to the Company Debt (where I will be the digital leader) after you finish this article. We offer a wide range of resources and guides to solve many of the problems you may encounter.
How to create a financial emergency plan
Follow this process to create a financial plan you can rely on. It is important to note that each of these steps is simple and completely doable. Don’t be alarmed. The whole process will take no more than an hour of your time.
Create a list of priority resources
Not all of your business resources are critical to running it. While they may be few and far between in the early days, what resources can you use if that means the difference between opening doors and folding them?
For example, do you have a business car that is nice to own but not critical to the core business of the business? Or maybe you have a brick and mortar that you could sell if your business depended on its survival? Likewise, there may be less significant employees that you could let go if the business was struggling financially. Remember, it will almost certainly be easier to think through your basic things now, rather than in the midst of a crisis.
Consider potential risks
There are a limited number of risks that can lead to failure. In fact, risks are usually relatively easy to foresee, even if you haven’t started yet. For example, what happens if a key customer travels elsewhere or if an important team member leaves the business? With the right planning, if there is a demand for the products or services you offer, the business can survive any kind of risk.
Make a list of possible risks and think about how likely each of the threats is to occur, and when they are most likely to occur (doing a SWOT analysis can also be helpful here).
For each of the threats you need:
• List the strategies and techniques you will use to minimize risks
• Details of the methods you will use to mitigate the financial impact of the risk should this occur
Determine how to implement the plan and who will be responsible for ensuring that
Take the information above and determine who will be in charge of fulfilling the financial contingency plan. As a business start-up, this responsibility is likely to fall on the business owner. You should also indicate who will have access to the documents required to act on the plan before and during the process, and include a list of team members who will know about the plans before they are put into action.
Check regularly – make sure your plans are up to date
The type of risks that businesses face face change at different stages of their development. The threat of late or non-payment is one of the leading causes of business insolvency, as is the insolvency of a company in the supply chain. However, before launching, your biggest threat will likely be whether you can secure funding.
There may also be changes in market conditions that cause the business to face new and previously unrecognized threats. To ensure that your financial plan is up to date and contingency, it is important that you update and revise the plan quarterly as your business grows.
Identification of alternative sources of credit
It is not uncommon for lenders to withdraw lines of credit or merchant vendors these days to reduce the credit they offer to your business if they are concerned about its financial stability. Proactively identifying alternative sources of credit that can be secured and assessing their financial feasibility will help the business continue to operate if credit lines are cut.
This should be a process that will be updated quarterly as the range of financing options available for your business will change. Don’t wait until your line of credit is removed to start thinking about this risk – it can take a long time for start-up companies to find alternative funding sources.
A typical approach to contingency planning is to decide what works best for the business and then think about where the money will come from to implement the plan.
However, when creating a financial contingency plan for startup, the likelihood of accessing the required capital is relatively low. For this reason, it makes sense to research the capital markets first and then adjust your strategic plan accordingly. Based on the money that may be available. Track financials weekly or even daily – you can do this using an Excel spreadsheet or dashboard. That automatically pulls your data from your accounting software.
Make sure you compare cash flow projections with on a regular basis so you can stave off a crisis before it has a chance to turn into something that threatens your business.
Creating a financial contingency plan may not be the number one priority for start-up companies. However, if 4 out of 10 UK businesses are not operational within the first five years. This is something that is serious about their survival should give a serious thought.