How to Plan Ahead for Unforeseen Business Expenses

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How to Plan Ahead for Unforeseen Business Expenses

As a small business owner even with the best of plans, you can be certain that unforeseen business expenses will come up.  

So whether you are just starting your business this week or have been in existence for decades, it’s important to be prepared. Here are a few of the most frequent types of unexpected expenses:

Equipment and Technology

You need the right equipment and technology to stay in business. A sudden equipment failure can throw your business into havoc if you don’t have a back-up plan.  To avoid this situation, have a professional review your equipment and technology every year to see if there are budding problems that can be resolved to prevent a total failure.  However, even with good planning and insurance, there are times when sudden problems pop up, and more often than not, it’s more expensive than you expect.

Utilities

If you own a physical store or office, you need to be ready for problems with electricity, plumbing and other building issues. While many expenses aren’t overwhelming, if you need to get your space rewired or new pipes, it can run into the thousands.

Labor Costs

Even if you are not planning to hire anyone new, a current employee may leave and onboarding new workers can create unforeseen costs, such as new uniforms and training. You also need to consider the lost productivity as your new employee learns the job. 

Legal fees

As a small business owner, you can do everything right and still wind up in a legal situation, such as a lawsuit over a contract term or a customer who slipped on your floor. Even if you eventually win, it can be costly hiring lawyers to defend your business, and you wind up losing a lot of time, which can hurt productivity.

Shrinkage

Shrinkage in this case refers to the reduction in inventory due to employee theft, shoplifting and administrative errors. It’s a widespread problem as the 2016 National Retail Security Survey reported that US retailers’ inventory shrink averaged 1.38 percent of retail sales, or $45.2 billion in the previous year.  Although you can offer training and other services to deal with the issue, it’s nearly impossible to fully prevent.

So how can businesses prepare for these unexpected expenses?  Below are some winning strategies.

Create a Budget

Many small businesses don’t create an annual budget. After all, there’s only so much time, and people expect it to somehow work out. That’s a big mistake, as a budget helps to understand if your goals are realistic. It also communicates your direction with your staff and make decisions more quickly since you have the information at hand. 

While creating a budget, you should set aside a percentage of cash towards unexpected expenses. Additionally, you should target a percentage of sales into that line item.  It can be as low as one percent, but over time, it will accumulate into a larger amount. Those months where you don’t have an emergency, you can increase the amount.

By planning ahead, you will know if you have enough money for contingency expenses. Uou’re a step ahead as you can decide how to obtain the necessary funds in the best manner without the time pressure of trying to get money while you have an emergency.

Start that Emergency Fund

An emergency fund ideally would be equal to six months of expenses for your business that would be easily accessible.  In an emergency, you won’t have to take out a loan or make another financial transaction that could hurt your business in the long run.

You can also use this fund in cases of exceptional business opportunities, such a chance to buy inventory at a significantly reduced rate. However, you need to carefully weigh whether it is worth the risk to go into your emergency fund.

Seek Out a Short-Term Loan

Sometimes, your unexpected expenses exceed your emergency funds, so you’ll have to seek out other options.  Alternative financial lending companies, such as BFS Capital can approve an application within a day and you will receive the cash in a few days, unlike major banks, which have processes that can take several months.

Another tip is to keep tabs on your credit score. The higher your score, the more choices you can pursue. Also the interest rate charged on financial transactions are often pegged to your credit score.


Erica Stone

Erica is a veteran journalist and editor whose experience includes Dow Jones Newswires and the Associated Press. She has written on a variety of topics ranging from sports to complex financial issues. 

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