DEFINITION of 'Contingency'

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 worse-than-expected outcomes, and arranging a company's affairs so that it can weather negative outcomes with the least distress possible.

BREAKING DOWN 'Contingency'

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.

For example, pending litigation would be considered a contingent liability.

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