The recent outbreak of the coronavirus has left many startups vulnerable and scrabbling to restructure in order to survive. Below are some steps to ensure your startup is putting together an effective plan to adjust. In addition to this guide, we’ve also created a Notion template you can use for your planning process. The link can be found at the bottom of this post.
Business Contingency Planning Checklist
The purpose of any contingency plan is to define steps you will take should adverse events occur.
Contingency planning asks 3 questions:
- What could happen? – Define the scenario
- What will we do in response? – Generate contingency options
- What can we do to prepare? – Set triggers, timelines & owners
When creating contingency plans it’s important to …
A good plan executed quickly is often better than a perfect plan that takes too long to develop and implement. There’s a term death spiral for businesses when you wait too long to adjust course. If you don’t make the difficult decisions now, you might not get another chance.
Have a base case
To create contingencies you must first have a clear understanding of your objectives and how you’re trying to achieve them. What are the scenarios which will prevent you from achieving your plan? Think of those scenarios as layers on to your plan. You then layer contingencies on top of those scenarios to ensure you remain on course.
Create clear triggers
For each measure you create, have clear events which trigger these plans. These triggers could be sales EBITDA misses or budget assumptions that prove to be incorrect. By keeping a close eye on factors linked to the triggers, you can get an accurate fast read on changing conditions.
Have multiple options
Look at all options available to you. There will undoubtedly be multiple options on how to address a problem. List them all out before you make a decision and have multiple options for your scenarios. There may be some factors you haven’t considered which may change your course of reasoning in the moment.
Be clear about who is responsible for actioning the contingency option. Each option should be quantifiable with an owner who is responsible for achieving that objective. Ambiguity is the enemy of effective action.
Working with others in the organization is the best way to generate a large number of creative ideas. It allows you to make informed decisions and it makes it much easier to get your team involved in all steps of the process. There are likely to be tradeoffs in your plan so be sure to get those involved who will be affected by these changes.
Communicate with purpose
How your plan is communicated to the organization and stakeholders is important. Be sure to speak in terms of opportunity and get others to help you promote and implement plans.
Step 1 — Define the Scenario
Identify risks/scenarios and prioritize them based on their probability of occurring and their impact. Focus on the highest-ranking events. Define the timeline of the scenario and its quantifiable impact.
Generally you’ll want to plan for a base case and 2–3 worst case situations.
- Scenario: 10% decrease in conversion of customers to paid due to COVID-19 outbreak
- Timeline: Likely to occur gradually over the next 12 months
- Metric: Revenue
- Probability: 10
- Impact: 7
- Prioritization: 1
- Scenario: CPAs increase by 100%
- Timeline: Immediate
- Metric: Marketing Costs, New Users
- Probability: 6
- Impact: 5
- Prioritization: 2
Step 2 — Generate Contingency Options
Generate options of how you could address the impending scenario. Organize by “Must Do”, “Should Do” and “Could Do”.
Areas to Evaluate
This is generally a good time to assess where resources are being committed. Look at the projects, products, customers and geographies your committing resources to. Are these your biggest opportunities? Moving resources away from areas which aren’t working to those which are can have a tremendous impact.
Example Option: Move security engineers over to development of paid product feature.
Often overlooked but pricing adjustments can be an easy win for weathering hard times. Do you have opportunity to increase prices even slightly in some areas? Generally even the smallest increase in pricing can have a dramatic effect on your bottom line.
Example Option: Increase pricing for US customers by 10%
Reducing fixed costs not only gives you an immediate and accumulating impact but it’s also quite easy to quantify. What are your running costs and what are the tradeoffs of reducing those costs?
Example Option: Close Office to eliminate rent expense
What options do you have in terms of financing or accelerating / delaying payments? What are the relevant costs to your business for each of these options? There is likely an ideal scenario in terms of working capital. Include all of them as options to determine your ideal capital structure under your scenario.
Example Option: Draw down cash advance against invoices
Typically tied to EBITDA and performance of the business. Bonuses are usually the easiest way to adjust for a plan being off course. It’s also an effective way to communicate to the company that there’s a problem.
Example Option: Freeze bonuses indefinitely
General Questions to ask when generating option ideas:
- What is most essential to deliver our service?
- What is most essential to continue operating?
- What is our current resource allocation?
- What can we do to reduce the risks identified?
- What are people working on and what is the return on that work?
- What are our financing options?
- What costs can be reduced?
- What measures could be taken to increase sales?
- What measures could be taken to increase the speed of payments in?
- What measures could be taken to decrease the speed of payments out?
- What is the current commitments of our teams and team members in terms of projects?
- What are your biggest opportunities you’re already working on?
- What are you working on with the least opportunity of success?
Once you’ve answered these questions yourself, give the questions to your team and relevant stakeholders who came up in your answers. It’s important to create these options with transparency. It’s likely your team will have ideas you’ve not considered. Additionally, any actions you take will have more buy in because you involved your team from the beginning.
Once you’ve compiled your options, label them as either “Must Do”, “Should Do” or “Could Do.”
- Must Do = Immediate & preventative measures to reduce risks
- Should Do = Triggered measures which will be implemented if X occurs
- Could Do = Triggered measures which will have significant tradeoffs
Step 3 — Set Triggers, Timelines & Owners
Clearly define what needs to occur for an option to be actioned, who will be the owner of carrying that action forward, the quantifiable impact and timeline.
Once these have been determined it’s time to put your plans in to action. Create tasks for owners and ensure accountability. If you have triggered options put in reminders to check in on specific metrics.
If you created contingencies for say a 30% drop in revenue, make sure you’re tracking this closely.
You’ve created a contingency plan to ensure you can act quickly should bad things happen. Be prepared to act quickly.
Step 4 — Model out the Financial Results
Now that you’ve confirmed your scenarios, options and triggers you should forecast your resulting cashflows.
Forecasting your cashflow will allow you to:
- Confirm cash runway
- Draw down lines of credit or loans
- Build investor confidence
Your forecasted cashflows you should show 3 things:
- What was our plan before COVID-19
- What is our plan now
- What is our plan in a worst case scenario
Ideally you will want to forecast out your cash balance on a weekly and monthly basis. If you don’t have a forecast already put together there are a number of excel templates online or you can use a software like Float.
In addition to these forecast tools, we have created a tool in Notion which is helpful in mapping out your scenarios, options and triggers.
In a further effort to provide assistance we’re currently providing free 90-minute consultations to founders.
Please get in touch if we may be able to help. Best of luck with your planning and stay safe.