how a contingency works
to plan for contingencies financial managers may often also recommend setting aside significant reserves of cash so that the company has strong liquidity even if it meets with a period of poor sales or unexpected expenses managers may seek to proactively open credit lines while a company is in a strong financial position to ensure access to borrowing in less favorable times for example pending litigation would be considered a contingent liability contingency plans typically include insurance policies that cover losses that may arise during and after a negative event however insurance policies may not cover all of the costs or every scenario for example business interruption insurance doesn t usually cover pandemics which many businesses suffered through as a result of the coronavirus pandemic the federal government had to step in and pass the coronavirus aid relief and economic security cares act which provided financial relief to businesses families and local governments to stem the economic hardship caused by the pandemic in particular the paycheck protection program ppp offered 349 billion in aid to small businesses to help them maintain their payroll and expenses 1insurance companies might also limit coverage or put exclusions in place for an act of god which is an exogenous event meaning outside of human control such as a flood or an earthquake also insurance can t replace the customers that were lost to competitors due to an event particularly if it was an internal systems issue such as a data breach as a result businesses need to have contingency plans established to help minimize the lost revenue and increased costs that are involved when business operations have been disrupted typically business consultants are hired to ensure contingency plans consider a large number of possible scenarios and provide advice on how to best execute the plan types of contingency planscontingency plans are utilized by corporations governments investors and central banks such as the fed contingencies can involve real estate transactions commodities investments currency exchange rates and geopolitical risks contingencies might also include contingent assets which are benefits rather than losses that accrue to a company or individual given the resolution of some uncertain event in the future a favorable ruling in a lawsuit or an inheritance would be an example of contingent assets contingency plans might involve purchasing insurance policies that pay cash or a benefit if a particular contingency occurs for example property insurance might be purchased to protect against fire or wind damage investors protect themselves from contingencies that could lead to financial losses related to investing investors might employ various hedging strategies such as stop loss orders which exit a position at a specific price level hedging can also involve using options strategies which is akin to buying insurance whereby the strategies earn money as an investment position loses money from a negative event the money earned from the options strategy completely or partially offsets the losses from the investment however these strategies come at a cost usually in the form of a premium which is an upfront cash payment investors also employ asset diversification which is the process of investing in various types of investments asset diversification helps to minimize risk if one asset class such as stocks declines in value contingent immunization is a type of contingency plan used in fixed income investing it involves the fund manager switching to a defensive position if the portfolio drops below a predetermined value as part of a contingency plan for disasters such as a pandemic companies need to plan ahead to ensure that the business can operate during and after an event this type of contingency plan is often called a business continuity plan bcp or a business recovery plan typically a business continuity team is formed to plan for any possible contingencies and manage the continuity and recovery plan during a disruption businesses need to identify their critical business functions and perform an analysis of how an event might impact the company s operations and processes the contingency plan would include implementing the recovery of critical business functions such as systems production and employee access to technology such as computers for example a contingency plan for a pandemic would include developing a remote work strategy to help prevent the spread of disease and provide employees with secure access to their work as a result companies would need to invest in technology which could include providing laptops and video conferencing access to employees creating cloud based data storage and facilitating access to company wide communications such as email and internal data with any type of disaster cybercriminals often try to take advantage of a crisis to hack into a company s systems and steal data or disrupt business operations contingency plans are used to outline the procedures for cybersecurity teams to protect an organization from threats and malicious attacks special considerationsa contingency plan should also prepare for the loss of intellectual property through theft or destruction as a result backups of critical files and computer programs as well as key company patents should be maintained in a secure off site location contingency plans need to prepare for the possibility of operational mishaps theft and fraud a company should have an emergency public relations response relating to possible events that have the ability to severely damage the company s reputation and its ability to conduct business 