Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Contingency”
A liability that exists because of a circumstance (such as a lawsuit) that may cause a business loss in the future depending on other events that have yet to happen (such as the outcome of a trial) and indeed may never happen. Contingency is a potential negative economic event which may occur in the future. In finance, managers often attempt to identify and plan for any contingencies that they feel may occur with any significant likelihood. To mitigate risk, financial managers often err on the conservative side, assuming slightly worsethanexpected outcomes, and arranging a company's affairs so that it can weather negative outcomes with the least distress possible.
To plan for contingencies, financial managers often recommend setting aside significant reserves of cash so that the company has strong liquidity, even if it meets with a period of poor sales or unexpected expenses. Managers may also seek to proactively open credit lines while a company is in a strong financial position to ensure access to borrowing in less favorable times.

By Barry Norman, Investors Trading Academy ITA