The Difference Between Risk Management and Contingency Planning—And Why You Need Both
You can’t predict every natural disaster, cyber-attack or organizational upheaval, but with the right financial planning?in place, you can minimize the effects and support business continuity. Two aspects of business continuity, risk management and contingency planning, are often confused and used interchangeably.
What’s The Difference??In simple terms, the two terms differ in terms of reactive versus proactive planning. Risk management is preventative, watching for potential threats to your business and putting plans in place to reduce those threats.
Contingency planning creates a roadmap for how you would deal with a disaster or threat if it were to happen. Contingency planning addresses how the business would respond if risk management methods fail to prevent a threat to the business.
Yet another term that can cause confusion is crisis management. This refers to the unplanned steps taken during an active crisis. While contingency planning tries to anticipate all aspects of a crisis, there will likely be factors that could not have been predicted ahead of the crisis.
Risk Management?examines everything from financial reports to insurance coverage to identify areas where your business might be vulnerable. It will take into account your cyber security policies, checks and balances on cash handling and whether your business is located in an area potentially affected by floods or wildfires. It will then take steps to minimize the impact these risks may have on your business.
Contingency Planning plans your reaction to a threat. It develops detailed response plans that would be accessed and followed in the event that your business’s physical location is damaged by a hurricane or fire, or your reputation is being attacked because of a PR disaster.
Your overall contingency plan should involve four key steps:
1.???? Completing a business impact analysis
2.???? Identifying and ranking risks
3.???? Development of contingency plans
4.???? Testing and refining of plans
Each segment of your contingency plan will focus on a specific risk and how it would be handled if the disaster materialized. It will include the names and contact information for key roles, specific tasks that mitigate damage to the company and tasks that keep business processes in motion.
As you work through your contingency plans, it’s important to be aware of the common pitfalls in this process. They generally involve issues like not having the buy-in of leadership or overinflating certain risks while overlooking others. You may also struggle to keep momentum going long enough to test your contingency plans and continue to update and refine them.
Why It Makes Sense to Outsource Contingency Planning: At first glance, contingency planning may seem like something only an employee on the inside could oversee. After all, how could someone know your business well enough to create a contingency plan?
In many cases, the opposite may be true. An experienced CFO will have overseen many risk management and contingency plans and will know how to anticipate and mitigate pitfalls in your process. They will also have an objective view of risks and preparedness, without the bias that can creep in among team members.
In addition, they will be familiar with successful approaches to keeping cash flowing during a natural disaster or how to prioritize additional insurance coverage against other risk management strategies.
Contingency planning and risk management may be the perfect time to try out the services of The Power CFO. We offer fractional CFO services so that you can utilize the expertise of a CFO when you need it, then scale back when you don’t. When you’re ready to find new ways to drive growth, identify areas for streamlining or develop a set of contingency plans, it’s time to contact us?at The Power CFO.