How to create a contingency plan for your small business in 5 steps

You’re humming along in your business, and suddenly — out of the blue — the unexpected happens. It could be in the form of a natural disaster that destroys your physical office or warehouse location, such as forest fires in California or hurricanes in the southern United States. In such an instance, you could lose expensive office equipment, inventory, or — if your data center that houses servers with your company’s digital information is destroyed — even large swathes of crucial company data.

Alternatively, you might experience an emergency with your people. Perhaps your most valued employee — the only one who knows how to operate your accounting and marketing software — decides to leave for a new opportunity. Or, in a worst case scenario, you might personally go through a medical emergency that would leave you unable to manage your business for an extended period of time.

It could even be something less dramatic that could have a significant impact on your company’s ability to turn a profit. You might lose your biggest client to a competitor or sales of your new product could flatline.

Any of these events could prevent a business from functioning, and that’s why it’s critical to have a contingency plan in place.

What is a contingency plan?

In the world of business and project management, a contingency plan is essentially a well-articulated “plan B” that can ensure your small business continues to function, even in the face of minor to severe setbacks. Stephen Bush, who is CEO of AEX Commercial Financing Group and boasts over 30 years as a small-business consultant, sums it up: “Contingency planning involves asking yourself what could go wrong for every aspect of your business, and then preparing an action plan for what you will do if that happens.”

While your contingency plan is intended to get you through difficult times, that doesn’t mean that creating one needs to be overly complicated. Here is a simple five-step process you can use to create an effective plan B in case of emergency, ensuring business continuity even through turbulent times.

Step 1: Identify the key risks

The first step in any good contingency planning process is to first identify the potential areas in your business that could possibly cause problems. To do this, many business owners brainstorm with their employees, looking at all areas of business operations and identifying all the things they think could go wrong.

Not only does involving your staff help you identify at-risk areas of the business you might not have considered, it also gets employees involved at an early stage in the process, making them more likely to remember the existence of any plan should an emergency actually occur.

Among the potential risk factors are things like the bank not agreeing to refinance your business mortgage or a software glitch that causes you to lose client data. Here are a few more examples:

  • Purchasing: What if your key supplier goes out of business? What if you lose your credit account with one of your major vendors?

  • Staff: How would you issue paychecks if your payroll clerk suddenly quits? What if one of your managers or directors doesn’t show up to work for a day — or longer? What if a key player on your team has to take maternity leave?

  • Sales: What would you do if your top producing salesperson took a job with your competition? What if one of your new employees committed a social media gaffe and people in your community began boycotting your business?

  • Natural disasters: What if the power in your area goes out and you lose access to your data, including customer information and receipts? What if a flood, earthquake, tornado, hurricane, or other natural disaster hits? Do you have a disaster recovery plan in place?

In addition to brainstorming with internal staff, Bush says it helps to have an outsider, such as your accountant or business consultant, “take a look under the hood” and provide some suggestions. After all, potential risks aren’t always obvious.

Step 2: Prioritize the risks

Once you have a complete list of the many possible scenarios that could potentially derail your business, it’s time to identify those that pose the biggest threat. For example, the skills training site Mind Tools recommends doing this by assigning a numeric ranking to each of the possible risks in two areas: probability and severity.

First, give each risk a probability ranking of 1 to 10, then rank it in terms of the possible impact on your business. After you have ranked them all, you can use Mind Tools’ free chart to create a visual representation of how to prioritize the risks.

Step 3: Create a backup plan

Once you’ve identified the scenarios that are most likely to disrupt your business operations, you’ll need to create a contingency plan for each. If your goal is to decide what you will do to resume business in case one of the disruptive scenarios takes place, you’ll need to outline a step-by-step plan for each one. Some of the key points you’ll want to consider are:

  • Timelines: When creating contingency plans, be sure to look at them from a timeline perspective. What will you need to do in the first hour after a data loss? What about the first day? The first week?

  • Communications: Decide in advance who will be in charge of communicating with everyone else for each scenario. Bush says that for small-business owners, it’s a good idea for them to personally assume responsibility for something this important.

  • Staff needs: Talk to each of your departments or employees and have them list exactly what they’ll need to continue operating if a given scenario occurs. Then make the necessary arrangements to provide it.

  • Reduce the risk: For example, for natural disasters, you can reduce the risk by making sure you have adequate insurance coverage. To reduce the risk of a data loss, you can store yours securely in the cloud and stay informed by signing up for free bulletins about current cyber risks from the Department of Homeland Security.

Because each risk calls for a unique contingency plan, you’ll have to devise one for each. If you’re creating a plan for natural disasters, the Red Cross offers a Contingency Planning Guide that could help.

Step 4: Share the plan

Once you’ve identified the potential risks and created a contingency plan for the risks you deem most likely to have a severe impact on your business (should they ever occur), you need to share those plans. After all, the plan won’t be effective if no one knows it exists.

Create a communication strategy to get the word out. You might consider a meeting where you call together all your employees to let them know you’ve created a backup plan in case of emergency. Alternatively, you might want to create a series of emails to announce the plan’s creation, as well as where to access it. No matter how you decide to communicate with your employees, just make sure they’re familiar with the company’s contingency plans.

Step 5: Maintain the plan

Now that you’ve created contingency plans for each of your risk areas and communicated them to your staff, you’ll need to ensure that those plans are updated on a regular basis and are easy to access if you actually do need them. Bush says business owners should consider reviewing the plans quarterly, and perhaps even monthly if you work in an industry where regulations change regularly or innovation happens quickly.

In addition to keeping your plans updated, here are some other tips to ensure that your plan will be of help should an unexpected situation arise:

  • Don’t store the plan only in digital form. While it might seem sensible to keep your plan on a shared drive or in email, what will you do if the power goes out or you lose your data? Without access to the plan, it’s almost as if you never bothered to create it in the first place. To avoid such a situation, it’s always a good idea to keep a copy in paper format.

  • Store a copy of your plan both in the office and offsite. You never know if something might prevent you from going to your company’s physical location, so it’s always good to keep a copy stored elsewhere.

  • As you make changes to your contingency plan over time, make sure that you continue to communicate those changes to all your employees. And if you change where the plan is stored, make sure they’re also aware of its new location and continue to have easy access.

  • Periodically as you revisit your plan and as you make any changes, you should also ensure that everyone knows their role in the plan and has the training required to perform their assigned duties in an emergency.

Get back to business

While it’s highly unlikely that your business will experience the ill effects of a life-altering catastrophe — whether in the form of a natural disaster or a complete technological meltdown — it’s always good to be prepared. According to Bush, things can go wrong, and it’s unwise for business owners to ignore those risks, even if they might seem minimal.

By creating a good business contingency plan, you’ll be prepared for the worst. Knowing you have a plan in place should disaster strike can give you peace of mind, allowing you to focus on what matters most to you as a small business owner or entrepreneur: growing your company.