For most businesspeople, the term “contingency planning” conjures images of natural disasters such as hurricanes, tornadoes, earthquakes, or floods and man-made crises like riots, fires, or terrorism. The concept of contingency planning is rarely tied in with routine business performance management. That’s because many companies fail to recognize how important it is to describe in advance, in detail, the steps the organization will take in the event that it fails to meet—or, conversely, in the event that it exceeds—its budget and performance plans.

Financial contingencies require rigorous planning and preparation, just as natural disasters do. And in financial contingency planning, the upside is as important as the downside.  It may seem counterintuitive to talk about a contingency plan when a business is exceeding expectations. Shouldn’t exceeding pre-established objectives be cause for celebration? The simple answer is no. Every company maintains a capital expenditure plan and a list of desired projects. Most budgets limit how many capital projects can be funded in a given year, in order to reduce risk and manage cash flow. When profits significantly exceed budget, a business will likely find itself sitting on the windfall at period-end, which means it lost out on the increased revenue that capital investment might have generated.

A well-thought-out contingency plan enables a company to launch quick, effective responses to changing market and business conditions. For example, one manufacturing company develops and maintains a lengthy list of potential projects­—all with paybacks of less than four years—that management has reviewed with the board of directors. The projects have not been approved in the current year’s budget, but they’re essentially a wish list. When the company gets well ahead of its budget, managers seek board approval for additional pre-qualified projects. This fluid capital planning capability prepares the organization to quickly take advantage of upside contingencies, allowing it to react faster and stay ahead of the competition.


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