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Eleven Contingency-Planning Tips

CFOs should note that plans must be tied to budget and performance goals, and that fast action means better results.

When people hear “contingency planning” they most often think about things like hurricanes, floods and fires. But contingency planning focused on business performance is vitally important. Every business needs a detailed strategy that outlines the steps it will take if it fails to meet — or, conversely, exceeds — its budget and performance plan. Indeed, in contingency planning, the upside is as important as the downside.

What? A contingency plan is needed in case you exceed plan? Yes.

Bill Fry, American Securities

Bill Fry, American Securities

Every company develops a capital expenditure plan and a list of desired projects. Most budgets limit the number of capital projects so as to reduce risk and manage cash. But a company might, for example, develop and maintain a much longer list of potential projects (all with paybacks of less than four years) and review those with the board of directors, even if not all of the projects are approved in the current-year budget. When the company finds itself well ahead of budget, it then proposes to the board additional projects already on the list (that have been pre-vetted). Such planning allowed the company to move much faster.

Contingency plans in general allow companies to mount quick, effective responses to changing conditions. Without that capability, losses can accelerate or companies can lose out on valuable opportunities. And you can never get back lost time.

Contingency planning should start with the annual budgeting process. That establishes a baseline for below-expected or great performance and defines key assumptions about the important markets a nd competitive impact. It also provides a structure to identify, quantify and prioritize risks and opportunities, set productivity goals and allocate resources.

While each contingency plan will be tailored to the needs of an individual company, it should include the following key components and potential actions.

Always have clear trigger(s) for action. Triggers could be sales or EBITDA misses (either overperformance or underperformance), or budget assumptions that prove to be incorrect. By keeping a close eye on factors linked to the triggers, companies can get an accurate, fast read on changing conditions. For example, is a sales decline a temporary blip, or the beginning of a sustained downward slide? It’s not always desirable to wait for the trigger if there’s a strong trend. “Rationalizing away” the trigger as only temporary can be costly in terms of time. The best companies look at multiple indicators of performance, not just sales compared to last year or budget, but also to trends like overall market growth, market share and competitive share.

Define specific actions to meet certain conditions. The best contingency plans identify multiple scenarios that cover specific actions the company will take under certain conditions. These scenarios include various levels of action, depending on the size of the problem. Not every plan miss will require the same level of response; having options offers flexibility and the ability to target the response more precisely.

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