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:
- 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?
- 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?
- What assets does your business have to either sell or otherwise turn into cash (perhaps a sale/lease back) if necessary?
- How will you keep your banker and major trade creditors on your side?
- Have you examined all possible sources of additional working capital in your business? Where might you have some leverage?
- 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.