What is a Financial Contingency Plan?

April 14th 2021

What is a Financial Contingency Plan? And why is it important in the current situation?

Creating a financial contingency plan is an excellent strategy for any business, regardless of its size or industry.

We are currently living through a pandemic, and with this, we know firsthand how crises and setbacks can suddenly strike, ranging from natural disasters to economic crises, technical failures, partner bankruptcies, and much more.

We know that this contingency planning is even more necessary now, and companies that are up-to-date are able to respond more quickly to this scenario and get their business back on track.

What is a financial contingency plan?

A financial contingency plan identifies the worst-case scenarios your company could face, the impacts on the business, and presents possible responses to these scenarios.

Companies typically develop financial contingency plans by collecting and analyzing data, and then delivering it to senior managers and executives who discuss strategies. In many cases, a company may hire a consulting firm for this specific purpose.

Typically, an organization develops financial contingency plans for each of the risks chosen by the group as the most likely. When a crisis occurs, the company uses the contingency plan as a guide.

Why are financial contingency plans so important?

Financial contingency plans provide the foundation for mitigating business risk, accelerating disaster recovery, and ensuring business continuity and resilience.

The COVID-19 pandemic highlighted for many companies the real need for a well-developed contingency plan, placing them in front of a new reality that demands much greater resilience from businesses.

What are the benefits of a financial contingency plan?

Maintaining financial stability and near-normal business operations may be the most important benefits of a financial contingency plan, but there are other important advantages it provides.

One of them is the emotional benefit, since advance planning can reduce stress and panic during a real crisis. With a clear plan in place, your team can quickly shift their focus to action amidst a challenging and often dynamic situation.

What is included in a financial contingency plan?

The financial contingency plan has two very important critical objectives: to address the immediate response to the crisis and to focus on normalizing operations after the event has occurred, or in areas of the business untouched by the crisis. For example, a short-term response to a financial crisis in a core business unit might include accessing an existing line of credit; a long-term response might involve diverting spending from ancillary or unprofitable units to the core business area at risk to help it recover.

The details and actions of a financial contingency plan vary depending on the size and type of business. Generally, a plan should include options for generating resources and/or cutting costs. The financial levers you should be prepared to pull might include:

Financing: Cash reserves are king in crisis situations. Although experts suggest that companies hold enough cash or other highly liquid assets to cover six months of operating expenses, studies show that many smaller companies do not. Access to lines of credit, short-term loans, and business continuity insurance are some other sources of financing that companies can access during times of crisis.

Costs: Expenses, personnel, and even entire business units may be cut or sold in an effort to protect profitable activities and maintain positive cash flow.

Enterprise Resource Planning (ERP) system: with access to such a system, the company gains access to detailed information through reports with real-time data. This helps company executives to have a clear and up-to-date view of the company's financial situation.

An ERP (Enterprise Resource Planning) system makes all the difference for companies seeking to develop a contingency plan to remain profitable even in the most challenging scenarios. Oracle NetSuite ERP is a fully cloud-based system designed to support growing businesses.