Contingency planning and the break-up of the Euro

The textbooks often find it hard to come up with a topical example of contingency planning which has widespread application - but I suspect that the possible break-up of the Euro zone is a good one. In fact I think this has to be the best example of a possible future event which is of such significance that almost every sizeable business needs to consider contingency planning.

With that in mind, this pdf document from accountants Deloitte provides some useful evidence of how contingency planning works. Its a detailed document and certainly not worth printing or reading in full. I have jotted down some examples from the document further below to illustrate the role that contingency planning plays for this potentially significant risk.

The key for students is to use examples like this to help develop the depth of their analysis. By using the Euro crisis, they are also able to demonstrate the use of relevant, independent research in their answers.

Let’s take a look…

Page 5 of the document provides some good examples of the risks posed by a possible Euro break-up and the resulting business implications and possible responses. Within that page are some good examples of how students can develop a chain of argument (using connectives) to explain the concept of contingency planning.

For example, let’s build a connected sentence using some of the examples on page 5.

The potential break-up of the Euro zone increases the risk that overseas customers who trade in Euros will no longer be able to pay, which as a result, is likely to mean higher bad debts or a worsening cash flow, which in turn could mean that the liquidity ratios of UK firms are made worse. The significance of this risk will depend on the proportion of revenues that are generated from such customers and the financial strength (particularly liquidity) of those firms. A role of contingency planning in response to the risk of customer defaults would be to reduce trade credit terms offered to customers who are deemed to be higher risk or to identify ways in which trade could be conducted at lower risk (for example by insuring debts).

That paragraph point provides some topical evidence of contingency planning. More importantly, it illustrates how connectives (shown in bold) can be used to help develop the points and to explore cause, effect and possible significance (evaluation).

What are some of the other risks posed by the potential breakup of the Euro? The report lists several, including:

Reduced sales are changed exchange rates may exported product from the UK much more expensive (remember SPICED: Stronger Pound, Imports Cheaper, Exports Dearer)

Supply chains breaking down due to financial failure (important for UK firms that are reliant on suppliers located in the Euro Zone

Reduction in the value of subsidiary firms located in the Euro Zone.

I’m sure there are plenty more - the relevance of which will depend on just how closely integrated UK firms are with customers and suppliers in the Euro Zone. However, given that Europe is the UK’s largest trading partner, that is likely to be an issue for many UK businesses.