Contingency in Business Explained for Dummies

What is a contingency?

A contingency refers to an event that might happen in the future, but its occurrence cannot be predicted with certainty. It is obvious from the following definitions that contingency is associated with uncertainty and negativity.[1]

• Cambridge Dictionary: ‘Something that might possibly happen in the future, usually causing problems or making further arrangements necessary.’
• Merriam Webster: ‘Contingent event or condition: such as an event (such as an emergency) that may but is not certain to occur.’
• Macmillan Dictionary: ‘Something that might happen in the future, especially something bad.’
• The Free Dictionary: ‘An event that may occur but that is not likely or intended,’ or ‘A possibility that must be prepared for; a future emergency.’
• Investopedia: ‘A contingency is a potential occurrence of a negative event in the future.’

A contingency can occur on a large scale like natural disasters (earthquakes, floods, droughts) or on a small scale such a strike by employees or the resignation of a key person in the management of a business. Although, a contingency can also be a positive event, such as when a business generates a greater than expected growth in sales.  

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Examples of contingencies

There are numerous examples of contingencies that can affect a business. Such as:

• Without a doubt, the Covid-19 pandemic, starting in early 2026, is one of the most devastating contingencies recently suffered by businesses.
• Physical damages caused to buildings, owned or occupied by businesses, by disasters such as fire, and hurricanes or other types of windstorms.
• Riots, looting, and political unrest. Thousands of businesses in South Africa suffered massive losses during July 2026 in this regard.
• Cyber attacks on businesses and other entities. The hacking of Transnet’s computer system on 22 July 2026 is a recent example of such an unexpected event, causing havoc in South African harbours and losses of millions of rands.
• Damages to or breakdowns of equipment.
• Another well-known example in South Africa is the occurrence of load shedding, due to Eskom’s inability to supply enough power to the national grid.
• Employees and managers can also cause contingencies for a business, such as:
• resignations of key persons,
• fraud, and
• theft.
• An economic recession. The Covid-19 pandemic with its resulting lockdowns pushed most countries into recessions, compelling thousands of businesses to close down.
• Interruption or discontinuation of the supply chain of a business, such as the loss of a major supplier.
• Failure of the IT system of a business.
• Incapacitation of the majority of employees due to illness, of which Covid-19 is an excellent example.
• The arrival of a strong competitor in the market.
• Political uncertainty (or even political unrest) because of major unexpected political changes implemented by a government.

 

Planning for contingencies

Noteworthy, the following two sayings with regard to contingency:

• ‘Luck enters into every contingency. You are a fool if you forget it - and a greater fool if you count upon it.’ (Phyllis Bottome (1884 - 1963, British lecturer and novelist.)
• ‘Your contingency plan is as important as your business plan.’ (Pooja Agnihotri - Author of 17 Reasons Why Businesses Fail.)

 

What is a business contingency plan?

A business contingency plan also referred to as a backup plan, plan B, or disaster recovery plan, is a proactive strategy by the management of a business, enabling the business to manage the occurrence of unforeseen negative events. The main goal of a contingency plan is to ensure that a business is able to continue operations during and after a negative or catastrophic event. Furthermore, a contingency plan must help businesses to recover from the effects of the risks a contingency. It plays a crucial role in business continuity and the management of risks, which can mean the difference between remaining in business and shutting down.  

Steps involved in the creation of a business contingency plan

# 1 - Establish a contingency policy Establishing a contingency policy in which well-described guidelines communicate how to act when negative and unforeseen events occur. The nature of a contingency will determine the type of guidelines recommended.   #2 - Identify different resources Identifying resources, internally and externally, available to the business will benefit the business when a negative event occurs.

• Internally

Identify the resources that will help to mitigate the effects of a disaster as well as persons who can manage the resources in advance. If possible, a disaster fund can also make funds available to manage the effects of a disaster.

• Externally

External resources will involve setting up credit facilities when the business is still creditworthy. This will enable the business to have access to funds when needed when a contingency occurs. In addition, insurance policies can cover losses incurred during a contingency.   #3 - Identify key risks This is one of the crucial steps in the creation of a contingency plan. Identify the key risks that will likely have a negative impact on the operations of the business. Key persons in the business as well as risk analysts from outside the business should be involved.   #4 - Prioritise the risks according to their impact This step is to prioritise the key risks according to the severity of their impact on the business.   #5 - Provide for different scenarios The contingency plan should provide for different contingencies, covering a wide range of potential risks and circumstances.   #6 - Share the contingency plan Share the contingency plan with all the employees and relevant stakeholders, ensuring the desired response from all those concerned when a contingency arrives.   #7 - Maintain the plan It is important to review the contingency plan from time to time as deemed necessary. It is also beneficial to inform employees and stakeholders accordingly. Employees should know if there are any changes in their roles and responsibilities.   [1] Accentuations in quotations are by the article writer.

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