Business Contingency Planning for Emergencies

March 24, 2020
Posted in: Uncategorized

Table of Contents

 

As the COVID-19 coronavirus takes its toll on people, businesses, and governments across the globe, it brings with it a sober reminder. A reminder of the importance of developing business plans for emergencies and contingencies. Its impact on people is, of course, top of mind but for the sake of this article, we’ll consider COVID-19’s significant and unpredictable impact on the business community – which ultimately affects people.

As more and more businesses are forced to temporarily close their doors and the stock market takes a deep dive in the wake of this pandemic, business owners and investors grow increasingly concerned.  Many business owners and corporate heads are doing their best to take steps that will minimize any negative impact on their employees and businesses.  

In a recent Forbes article, Bill Conerly (economist, member of the Oregon Governor’s Council of Economic Advisors, and Chairman of Cascade Policy Institute) shared his thoughts on proactive planning to cope with the COVID-19 crisis. Conerly also discussed the need to prepare for other contingencies and external changes including major shifts and events in the economy, technology, social attitudes, government, and competition.

Unfortunately, the average business owner or CEO doesn’t plan for such contingencies because they’re focused on developing plans for growth. When business is good, they’re not thinking about what they will do should something go wrong. 

However, the outbreak of the COVID-19 coronavirus is proof that things can go wrong quickly for any number of reasons. Business owners and corporate heads could suddenly find themselves asking the tough questions such as: 

  • What if a significant number of our employees get sick and our key operations are disrupted or come to a sudden halt?
  • What if there’s an unexpected labor shortage or bout of inflation?
  • What if an election outcome leads to sudden unfavorable changes in national economic policies?
  • What happens if a critical industry conference gets canceled and we aren’t afforded the opportunity to market and network as planned?
  • What happens if a pandemic (like COVID-19) causes issues with inbound shipments from our overseas suppliers?

These are the types of questions business owners and executives must ask themselves. They’re vital to planning for major events that could negatively impact their businesses. It’s important to identify the most likely events that could occur and then determine how you’ll prepare for them and which actionable steps you’ll take.

For example, if a situation becomes financially dire, could you sell assets or use a line of credit to stay afloat? How will you strategically cut costs and still maintain adequate productivity? Should you diversify your product line, customer base, or suppliers to avoid a crisis if one of them is disrupted?

It’s not possible to prepare for every contingency. The best you can do is prioritize events and develop a plan that realistically and effectively considers your most vital contingencies and business goals. Your plan should also take into account how you’ll respond to an unexpected event and the timeline for taking action.

Developing a plan is important for businesses of all sizes, but it’s especially important for larger companies. In larger companies, there are more factors that could make it difficult to quickly and effectively respond in the face of a major change or emergency. 

As we’re now witnessing with the COVID-19 coronavirus, the pandemic is catching businesses, consumers, and governments off guard. It shows that businesses can’t afford to wait until an emergency situation occurs to develop a contingency plan. It’s a reminder of how important it is to plan ahead, even when business is booming. Companies should never lose sight of the fact that an unfortunate development could be right around the corner and threaten everything when it hits home. 

If you failed to develop a sound contingency plan and find yourself in the midst of a crisis, it’s not too late to get started on creating the best plan you can at this point. Fortunately for you, whether you were proactive or are now being reactive, you can engage the services of consultants to help you quickly bring your plan up to par. Experts in business planning, contingency planning, and management consulting can perform a risk assessment and help you identify and mitigate the most likely risks to your business. From there, they can provide guidance on developing a contingency plan that will help you respond appropriately and protect your business.

 

fire extinguisher

 

What is a Contingency Plan?

 

A contingency is defined as “a future event or circumstance that’s possible but can’t be predicted with certainty,” either on a large scale, such as a natural disaster, or a small scale, such as loss of a key employee. 

A contingency plan, also referred to as a disaster recovery plan, is a roadmap created by management to help an organization respond to an event that may or may not happen in the future. It’s a plan devised for an outcome other than in the normal course of business. It’s often used for risk management for an exceptional risk that, although unlikely, could have catastrophic outcomes.

The purpose of a business contingency plan is to help your business resume normal business operations after a disruptive event. A contingency plan can also help organizations recover from disasters, avoid negative publicity, and handle employee injuries. For example, a large number of a company’s employees are traveling by plane together and the plane crashes with no survivors. Again, the loss of lives is of primary concern but from a business perspective, this event could bring the company to its knees. By developing a contingency plan, the company can react faster to this disastrous event and recover quicker. To mitigate this risk, the company’s contingency plan could include the requirement that no more than a certain number of employees can travel on the same plane. 

Governments also make contingency plans to protect their citizens from external threats. For example, during the Cold War, many governments developed contingency plans to protect citizens from the threat of nuclear attacks. The British and American governments’ contingency plans included the issuance of booklets to inform citizens of how to survive a nuclear attack. There are still contingency plans in place to handle terrorist attacks or other disasters.

 

emergency

 

Why You Need a Contingency Plan

 

For every business, there’s the possibility of an event that adversely impacts operations. If the business’s response is inadequate, the event could dramatically impact the future of the business. The catastrophic event could lead to loss of customers, data, or the business could cease to exist.  

A sound contingency plan will help you prepare for the likelihood of the event occurring. The plan should include all events that could disrupt operations and what you’ll do should any of the following occur:  

  • Natural disasters:  hurricanes, fires, and earthquakes 
  • Crises:  threatening employees or customers, on-the-job injuries, and worksite accidents 
  • Personnel: the death of a key employee, union members going on strike 
  • Data loss:  due to natural disasters, sabotage, or other criminal activity (i.e. hacking of company website) 
  • Mismanagement:  theft, neglect of vital duties, or accidental destruction of property or data
  • Product issues:  product recall, massive order that requires redirection of factory resources

 

How Do You Create a Business Contingency Plan?

 

Basically, your contingency plan will work as a series of events based on priority. As a first step, list the most likely events that could negatively impact your business. Arrange the events in the order of the most impactful and most probable. All risks are not created equal, and most contingency plans can’t deal in depth with every single potential risk. You need to figure out which are most likely and would affect the company most. Then rank the events from 1 to 10. What would be the impact of each event? For example, a small fire isolated to one machine will likely rank lower than the entire building catching fire.

Next, rank the events based on how often they might occur. For example, you could give an event a score of 10 if it could happen once a month or a 1 if it might happen once every five years.  Then, multiply the two scores, for impact and likelihood, to arrive at a total score. 

Concentrate on the events with the highest scores first. Events that affect areas that are essential to the company’s survival, such as maintaining cash flow and market share, are usually put at the top.

For each event, write how you’ll prepare to reduce the impact and what actionable steps you’ll take following the event.

If you’re faced with a financial crisis, for example, what contingency steps will be the most important or will be most likely to get you back on track fast? Will it be the selling of assets? Or will the assets be used as collateral to secure a short-term loan or line of credit? What can you do now to help you weather a potential storm? Can you cut costs in any operational areas without compromising productivity? 

By performing this exercise, you’ll have an action plan ready to execute immediately after taking a major hit. The key to being prepared is to create a contingency plan early, communicate it to all team members, and update it at least annually.

A sound contingency plan will take the following four areas into account:

 

1. Employee Safety

Employee safety must come first, regardless of how large a threat an event poses to the business itself. Employees should know what to do in an emergency situation and be assured that their safety and well-being is your top priority. Let employees know that safety contingency planning is in place by sharing it during the employee onboarding process

 

2. Communication Plan

In an emergency situation, you likely won’t be able to communicate as you normally do. If you’re without power or can’t gain access to the office, you need to devise a plan that allows you to still communicate with employees. 

For example, you could have an additional phone number that’s associated with a landline phone that can work without electricity. With this type of setup, you can act as “communication central” so employees can still reach you regarding business matters or to get updates on the situation. 

Another important communication plan step is creating a master phone list that contains the phone numbers of all employees. Share it both digitally and in print. This list should also be kept at the homes of a few executives or key employees. Employees should also be encouraged to have backup power sources (at home and in the office) for their phones and technology (i.e. computers, laptops). 

 

3. Data Backup and Recovery Plan

If data is critical to your business operations, you most likely already have a data backup and recovery plan in place. If you have yet to create one, now’s the time to get it done. There are several simple, cost-effective measures to employ such as:

  • Buying insurance 
  • Having a backup power source such as a generator
  • Backing-up your data in the cloud, and backing-up your backup (you can never be too safe)

 

4. Finances

It isn’t prudent for a business (or individual, for that matter) to have all of its money in one bank account. If you’re guilty of this, establish at least two separate bank or investment accounts for your business as soon as possible. Keep as much cash as you can in the second account to tide you over in case of an emergency. It doesn’t have to be a lot of cash – you can always add to it over time.

 

documents

 

Brainstorm “What If” Scenarios

 

Determining potential risks is one of the most important aspects of a contingency plan. This won’t be a one-size-fits-all process. You need to determine the risks that are unique to your company.  There are many possible risks that businesses can face. 

Once you’ve accounted for the four plan areas above, test the feasibility of your contingency plan by thinking through the worst-case scenarios for your business. You won’t be able to predict which disasters will occur and when. But, if you think through a few scenarios, you’ll be better prepared should they occur.

Disaster or hardship can come in many forms. Here are some disaster categories to think through:

  • Natural disasters:  i.e. power outages, winter storms, floods
  • Intentional malice:  i.e. destruction of data or property
  • Financial:  i.e. cash flow issues
  • Legal:   i.e. lawsuit brought against the company
  • Employee:   i.e. death of a key employee

Brainstorm these disaster categories with your team and discuss what would happen to your business. As unpleasant as it may be, consider the worst-case scenario. What can you do to protect your business from the worst-case scenario? The preventative measures you come up with should be incorporated into your contingency plan.

 

Reducing Risk

 

A business owner has to do more than developing a contingency plan and then sit back and hope the outlined risks never happen. The best course of action is to develop preventative strategies to reduce the risks.

  • What local resources would be available if the risk occurred? Consider the availability of partners.
  • The most sound contingency plans help companies identify areas they can improve so that they reduce the likelihood that they’ll need the plan in the first place.
  • Obtaining a disaster insurance policy is a good idea as well as conducting disaster drills. Do any key employees need additional training? Do you have a back-up system in place to avert threats to data? 

 

Factor Timing into the Plan

 

Without knowing ahead of time how much devastation an unexpected event will cause, it’s not possible to predict how long it will take for your business to get to the recovery stage. You can, however, put a roughly estimated timeline in place. This will help you to more effectively implement the actionable steps in your plan should the unexpected occur.

When establishing timelines, your most important goal (after ensuring employee safety) should be keeping the company solvent. If you’re hit with a financial emergency and implement the actionable steps in your contingency plan (i.e. selling assets, apply for a line of credit), how much will it help your business and for how long? You need to have an idea of the time frame required for getting back on your feet. 

If your actionable steps include ramping up sales, how much inventory will you need to sell in that time frame in order to recover or break even? In essence, your actionable steps will buy your business a certain amount of recovery time. For each step, give an estimated recovery time frame. For example, if filing a disaster insurance claim is an actionable step, how much time will the proceeds give you? Say it’s three months. If that’s not enough time, you’ll need to also implement other actionable steps until you get to the amount of recovery time you need. 

You may also have to cut discretionary expenses to buy more time. When your business is in survival mode, every dollar counts.

 

piggy bank

 

Emergency Financing or Fund

 

To minimize the effects of a financial crisis, it’s a good idea to have either a standing line of credit, a pre-approved loan, or an emergency fund. Having either of these in place will save you a lot of time and headaches if disaster strikes. You can immediately access those funds to stay afloat until your business fully recovers from the crisis.

A simple and painless way to build your emergency fund is to set aside a small percentage of your monthly revenue until you’ve reached an amount that will cover your most probable and costly financial crisis. Should a crisis occur, you can draw from the fund to remain operational and solvent. If the crisis is industry-wide, you’ll be ahead of your competitors who don’t have contingency plans and emergency funds. Many will have to close their doors which will allow you to capture a larger share of the rebounding market. 

 

Disaster Insurance

 

Insurance coverage for natural disasters and events outside of your control is a must-have. Look for policies that will reimburse you for assets lost due to natural disasters and other calamities. Don’t try to save a few bucks by foregoing essential add-on protections to your policy. These add-ons could be just the thing that saves your business should the unthinkable happen. Work closely with your agent and consult an attorney to maximize your potential payout.

 

Plans for Small Businesses

 

Creating a contingency plan for a small business is pretty simple because the business has fewer employees and dynamics to consider. For some small businesses, the plan could be as simple as cutting costs and using an emergency fund or savings account to cover any unexpected shortfall.  

Small businesses have the advantage of being agile and able to respond to sudden changes in the market. On the other hand, small businesses typically own fewer assets and can’t rely on selling those assets in a crisis because they’re generally needed to generate revenue. When this is the case, the contingency plan should contain a provision for protecting the assets that are used to drive income. 

For example, a construction company should only sell its essential equipment as a last resort. If the company owns two excavators, one of the excavators may need to be sold in a dire situation. However, selling both excavators constitutes going out of business unless the owner can access this equipment in another way, such as by leasing. 

Owning assets outright gives companies more options for raising funds after a disaster. These funds could mean the difference between staying afloat and filing bankruptcy

 

books

 

Plans for Medium & Large Businesses

 

In larger companies, there are more employees, departments, and dynamics to consider when creating a contingency plan. If one of the actionable steps in your plan involves cutting jobs and assets, the least important departments and assets should be looked at first. 

When disaster befalls a larger business, detailed accounting and a strategic approach for dealing with the situation is required. If cuts will need to be made, they shouldn’t come from the department or operational area with the highest revenue and lowest overhead.  

Although larger businesses have more areas to cut from and move around, this can be a disadvantage in an emergency situation. Having so many moving pieces can bog the business down and inhibit the speedy execution of the contingency plan. When revenue is spiraling downward, time is of the essence. The business needs to react quickly before they reach the point of no return. 

 

Executing the Plan 

 

You’ve got your contingency plan on paper and that’s great, but there’s more to do. You need to assign roles and enforce the plan. Above, it was recommended that you brainstorm “what if” scenarios with key team members. Those same team members can take part in the execution of the plan by assuming certain “positions”. Tell them which role and responsibilities they’ll have so there’s no confusion if the plan needs to be implemented in an emergency. This will reduce the chances of panic.

Also, make sure all team members have the proper training to meet their responsibilities as outlined in the plan. Make any necessary adjustments after observing the training. Hold drills if needed.

As the business owner, you’ll determine when the plan should be enforced. One of the team members could be assigned the coordinator role and be responsible for managing the actionable steps to ensure that the plan is being properly followed and executed. This person keeps everything moving along. 

An auditor role should then be added to double-check the contingency plan and look for weak areas. If deficiencies are found, revising the plan may be necessary. 

Lastly, one team member should be assigned the challenging communications role. This person will be tasked with communicating any new procedures and business organization to all employees and the public. This could involve enforcing layoffs and defending the company’s actions in a public relations type of role. 

 

Testing the Plan

 

To ensure your contingency plan is feasible, it should be tested. Testing in four stages will make the process manageable and cost-effective. If an area is found to be flawed or conflicts with the contingency plans of other departments, you can modify and retest the plan. 

  1. Senior staff review: Senior employees review all contingency plans. 
  2. Interdepartmental review: Every department reviews another department’s plans. This is the stage where resources are allocated and conflicts are identified. 
  3. Study critical system failures: This stage of testing can be accomplished within departments. Testing involves the simulation of system failures. Scenarios can be role-played without actually shutting down equipment. 
  4. Full testing:  Finally, the contingency plan should be fully tested. This may involve temporary shutdowns in key areas.

 

 

mask

 

Planning in the Wake of COVID-19

 

When it comes to having systems in place to handle crisis situations like the COVID-19 coronavirus, companies could take a page out of Weddingstar’s playbook. With distribution channels in Canada and the U.S., Weddingstar is a retailer of special occasion products. Many of those products come from manufacturers in China. According to CEO Rick Brink, Weddingstar relies on approximately 200 suppliers for its varied product line but as of February, only one factory in China was up and running in the wake of the coronavirus outbreak. 

To minimize the pandemic’s effect on stock levels, Weddingstar, who usually places new purchase orders in May or June, realized there would be a delay in order fulfillment so placed orders in February instead. They want to get their purchase orders in the queue now because they know there’s going to be a backlog of orders when suppliers in China are back to operating at full capacity. These orders were placed in addition to the orders placed in December of the previous year (in line with the company’s normal practice of stocking heavily at the end of each year).

By placing orders in this manner, the company expects the orders to get them through to later in the year.

 

Final Thoughts – Business Contingency Planning for Emergencies

 

We don’t know what the ultimate impact of COVID-19 will be but we hope the virus will be contained as quickly as possible. From a business perspective, the COVID-19 outbreak teaches a valuable lesson:   contingency planning is a worthwhile exercise. As companies struggle with decisions like whether to move employees to a remote work arrangement, this becomes more evident.

The two primary objectives of a contingency plan are:

  1. Contain and minimize any loss.
  2. Continue operations as close to “normal” as possible.

As you’re creating your contingency plan, keep in mind that contingency planning isn’t an exact art. In many instances, it comes down to analyzing the numbers and coming up with a way to keep your business solvent in the event of a crisis. Your plan should include clear goals and be adhered to with any required revisions and testing along the way. Turning a calamity-stricken business around is no easy feat and will require some difficult decision-making. 

Once you’ve created the first iteration of your contingency plan, it should be shared with team members. It’s also a good idea to print out several copies and distribute them to key employees asking that they keep the copy at home. At least once annually, review your plan, update as needed, share again, and reprint. 

 

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