Unexpected business expenses occur regardless of your type of business, it´s size or age. It happens to all businesses at some time or another. It is important to be prepared when these unexpected expenses pop up to minimize the risk to your business.
What types of unexpected expenses can your business anticipate in the future? Here is a brief list of frequent types of expenses below:
If your business is “brick and mortar”, whether you own or lease the property, you are likely to have some level of financial responsibility in case something “breaks”. A business physical structure requires maintenance and is subject to problems with electrical wiring, plumbing, roofing, insulation, lighting, signage, etc. Reparation or the need to replace with new can be a minor or major financial investment. Like the weather, prediction is difficult.
Almost every business is dependent upon various levels of technology to function. These include computers, POS equipment, software, networks, Internet, etc. If you “outsource” parts of your business technology needs, it is important that you select the right technology providers. Quality, consistency and reliability have a price tag that you need to take into consideration in your selection process. Have a plan of action when your business technology systems slow down or break down. Technology evolves rapidly and you need to be aware of its competitive benefits, costs and risks. If you are not “technical”, contract an expert to review your systems, back-up plan, etc. to avoid a total system failure that will halt your business activity.
There are a variety of business expenses related to your personnel. Your workers may unexpectedly leave due to medical or personal issues beyond your control. Your personnel may be recruited by your competition. Your business may need to change workers due to performance issues. Whatever the reason for the change in your personnel, your business will experience a variety of expenses. These expenses include lost of productivity, loss of revenue, higher recruiting and training expenses, new uniforms, etc. And don´t forget the costs of personnel severance and other labor liabilities when your workers leave. If the labor market is “tight”, your business might lose additional personnel once the process starts or you made need to increase salaries and benefits.
If your business is dependent upon a physical inventory, it is best to think of it like “ice”. It is always melting. That is, it is always shrinking in size and in value as time moves forward. Why? This is due to a variety of factors including employee theft, consumer shoplifting, wrong product mix and poor administrative control. If you consult your accountant, he/she can probably advise you as to the percentage of monthly loss you should budget. Best bet is to train your personnel on basic ways to keep the business inventory “fresh”, in demand and moving out the front door. It will never prevent inventory shrinkage but your goal is to reduce the loss to a minimum where your business can be predictable and profitable.
A prudent business owner has a lawyer, accountant and insurance to prepare for the unexpected. Lawsuits, new business regulations, unexpected taxes and Acts of God have a way of always placing at risk a small business. Prepare as best you can, but anticipate the loss of time, productivity and increased costs due to legal demands. Whether your business ultimately wins or loses in court, your business has already been distracted from its core business activity. Your accountant´s primary purpose is to help your business be “legal” with the tax authorities, reduce tax expenses and increase profits. Your accountant should demonstrate the the return to your business versus his/her monthly expense. Insurance is a basic expense to offset an unexpected larger expense of replacement.
Here are a few strategies to help your business prepare for these unexpected expenses.
Establish A Budget
A budget is your business financial plan. It does not need to be complicated, but it will help the business owner prioritize activities and aid communication with staff personnel. If you have “pre-planned” and prioritize, you minimize unexpected surprises and likely make decisions with greater likelihood for success. If you don´t have a budget for your business, take some “quiet time” to get it done.
Your budget should set aside a percentage of sales to create an emergency fund to offset unexpected business expenses. Whatever the minimum percentage established, be consistent in setting aside the cash as a capital reserve. Over time, if consistent, your capital reserve will accumulate into a larger amount. By consistently funding your business capital reserve to cover unexpected expenses, when your business has an unexpected expense, it is not an financial emergency. As a result you will have greater flexibility n your decision-making process and more likely business success.
Formalize Your Emergency Plan
To avoid a financial emergency, you should establish as a business goal a formal fund that represents six months of your business sales revenue percentage. In an emergency, this capital fund now allows you to avoid taking out a loan or making a financial decision that would adversely affect the business. Alternatively this fund can be used to take advantage of exceptional business opportunities, particularly purchases of inventory or technology at reduced rates. You as the business owner need to be conservative of weighing the benefit of “tapping in” to the business emergency fund.
Investigate Third-Party Financing
If your business emergency fund will not completely cover a major unplanned expense, you should have already identified other business financing options. Talk with your bank to determine what financing options they may offer your business and how long to receive the funds. In many instances this may take weeks or months. Investigate alternative capital funding companies who can respond in days, rather than your traditional bank to cover your business emergency.
The types of unexpected business expenses and strategies a business owner can take to prepare are presented. The business owner should establish a formal budget, an emergency expense fund and third-party financing options to prepare for when an emergency will occur.
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