Debt Management and Banking: Establish a Contingency Plan

Show your creditors that you can handle a cash crunch with a plan for managing crises.

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A contingency plan is a plan you hope never to use: It outlines what you would do if all of your optimistic plans went wrong. It doesn't have to be lengthy. In some cases, it can be as short as a single page and still be more than adequate, although for most businesses it will be somewhat longer.

A contingency plan should provide answers to the following questions:

1. What suppliers would give you extended terms or carry you in case of a crunch? Why would they carry you? How long, and how much?
2. What new investment could you make? Would you refinance personal assets to provide a cash cushion for your business? Could you? What other assets could you bring to support a cash crunch?
3. What assets does your business have to either sell or otherwise turn into cash (perhaps a sale/lease back) if necessary?
4. How will you keep your banker and major trade creditors on your side?
5. Have you examined all possible sources of additional working capital in your business? Where might you have some leverage?
6. What customers would be willing to prepay or speed up orders if it would help you?

The purpose of a contingency plan is to make sure before a crisis hits that you won't panic. As evidence of thoughtful business management, a contingency plan is hard to beat and is being sought by more and more creditors.

This material was excerpted from Chapter 5 of Financial Troubleshooting, by David H. Bangs Jr. and Michael Pellecchia.

Copyright 1999 Goldhirsh Group Inc.

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