No matter how good things are going, something can go wrong that sends you side ways and without solid contingency plans in place, your cash flow and business could completely disappear.
Now contingency planning is for stages of stability and growth. If you’re cash flow is already in trouble or going to be in trouble very soon, then its not contingency planning, its crisis management.
By this definition, you may ask why you need to even bother going any contingency planning. If everything is going well and perhaps has been good for a long time, why dedicate time to this activity.
Here’s a real world example.
Customer imports a product and repackages it under different consumer brands, has been profitable for 20+ years, does over $10.0M a year.
Great cash flow model where suppliers provide 90 day terms on product imports and receivables are collected in 60 days. Operating costs covered by a long standing line of credit.
Everything runs like a well oiled machine.
Then the recession hits. And all the suppliers cut back their terms from 90 days to 30 days.
Big problem. Totally unforeseen. Right before prime time of this seasonal business. If it can’t be corrected quickly, the business is all of a sudden in big trouble.
The end of this story was that the business did find a way to stabilize the ship, but there was no contingency plan to draw from and as a result the business was not only in distress, but on the verge of losing customers. The problem was solved through pure crisis management, which can work, but is unpredictable and typically more costly than drawing from a contingency plan designed for a cash flow shortage.
The big problem with me preaching contingency planning is that I’m preaching prevention, not cure. Its like telling you to back up your computer everyday or buy life insurance or brush your teeth before going to bed.
And as a result, I’d say 90%+ of businesses don’t have any type of meaningful cash flow contingency plan.
Perhaps that would change once business owners and managers understood the risk they aren’t managing. Maybe.
In reality, most business financing is crisis managed or what I like to call unplanned events.
I’m going to talk about cash flow contingency risk assessment and prevention in future posts. For now, I’d just suggest that you take a quick look around your cash flow and see if there is anything that can be flagged as a high risk to your business. This is definitely a worth while exercise and should be done at least a couple times a year.