A contingency funding plan (CFP) is a financial management tool that outlines a company's strategy for managing unexpected events or disruptions that could impact its liquidity. A CFP is designed to ensure that a company has sufficient cash reserves or access to funding to meet its financial obligations during times of stress or uncertainty.
· The CFP should distinguish between bank-specific and general market liquidity situations, and have appropriate responses to each situation.
· The CFP should define responsibilities and decision-making authority so that all personnel understand their role during a problem situation.
· The CFP should identify the sequence that the bank will mobilize and commit key sources of funds for contingent needs. The degree of uncertainty as to the magnitude, timing, and availability of recourses may call for different priorities in different situations.
· The CFP should identify other actions necessary in the event of an unexpected contingency.
· The CFP should assess the potential for funding erosion (magnitude and rate of outflow) by source of funds under different scenarios.
· The CFP should assess the potential liquidity risk posed by other activities, such as asset sales and securitization programs.
A CFP typically
includes several key elements:
1. Risk Assessment: A CFP starts with an assessment of the risks that
could impact a company's liquidity, such as natural disasters, economic
downturns, or regulatory changes.
2. Trigger Events: A CFP identifies specific trigger events that would
activate the plan. For example, a trigger event could be a significant decline
in revenue or an unexpected increase in expenses.
3. Contingency Funding Strategies: A CFP outlines various contingency
funding strategies that a company can use to meet its liquidity needs during
times of stress. These may include accessing credit facilities, selling assets,
or drawing down cash reserves.
4. Funding Sources: A CFP identifies potential sources of funding that
a company can access during times of stress, such as lines of credit, bank
loans, or asset sales.
5. Action Plan: A CPP includes a detailed action plan that outlines
specific steps that a company will take to manage its liquidity during times of
stress. This may include reducing expenses, accelerating collections, or
negotiating with vendors and suppliers.
6. Monitoring and Reporting: A CFP establishes a process for
monitoring and reporting on the company's liquidity position during times of
stress. This helps to ensure that the plan is being implemented effectively and
allows for adjustments to be made as needed.