Running a business can get expensive, and covering these expenses can become problematic if you’re unprepared for them. From employee turnover to equipment repair to inventory loss due to theft, unforeseen expenditures can wreak havoc on a business’ budget. Here are six ways companies can soften these blows and respond to unexpected costs.
1. Anticipate Expenses
Some expenses in the business world are genuinely unpredictable, while you can anticipate others if you do the research you need to do to become aware of them.
Businesses not in the automotive field, for example, might view replacing the timing and serpentine belts in their company car as an unexpected expense. However, it’s common to replace these components every 60,000 and 40,000 miles, respectively. Checking your company car’s owner’s manual can help you plan for these costs.
You can even plan for the more unpredictable costs, albeit in a less precise manner. For example, research the risk of natural disasters in areas where you have facilities so you can better prepare for the expenses they may cause.
Once you’ve done your research and you have a better idea of your expenses, incorporate them into your budget. It’s best to make your budget as detailed as possible and to work with a certified accountant.
You should budget for regular expenses, but also leave some extra wiggle room for things that are unexpected and difficult to predict. Set aside a predetermined percentage of revenue for these potential costs, rather than just whatever is left over. That will help ensure you always have some money set aside if something comes up.
3. Emergency Fund
If no unforeseen costs come up during the month or quarter, put the money you set aside into your emergency fund. This fund, also called a capital reserve, should contain enough to cover at least six months of your expenses at any given time.
You can use this capital reserve for true emergencies, like natural disasters, but also for time-sensitive business opportunities. If an investment opportunity or the chance to buy supplies in bulk at a huge discount comes about, you can take the chance and invest the returns back into your business. Without an emergency fund, though, you might not have the capital to take advantage of these deals when they arise.
Another way to deal with unexpected costs is to work to prevent them. While, of course, you can’t control every factor that influences your expenditures, you can take actions to reduce the likelihood of encountering high costs in the future.
For industries that use heavy equipment, like manufacturing and agriculture, equipment repairs are an inevitable part of doing business. However, doing repair work before a piece of equipment fails costs 2.5 times less than waiting until after. If machinery fails entirely, the repair itself will be more expensive, and your company will also experience extended downtime.
Performing regular maintenance and paying attention to problem indicators can reduce repair costs and make them easier to predict and, therefore, budget for.
Having robust insurance policies in place can help protect you from potentially devastating future expenses. Predictable monthly insurance payments are much easier to manage than the enormous costs of having to pay for incidents yourself. Often, the types of events insurance cover are expensive enough to shut down an uninsured business.
The types of insurance coverage you need depend on your industry and the characteristics of your business. For example, you may want to get a broad insurance plan like small business coverage, but also more specific plans for workers’ compensation, professional liability, business interruption and property.
6. Keep a High Credit Score
Another strategy for responding to unexpected costs is keeping your business’ credit score up. You may need to borrow money to cover expenses at some point. A good credit score will enable you to get the loans you need at a lower interest rate. Having a good credit score can also help you get better deals on other expenses, such as insurance coverage.
Difficult-to-predict costs are part of doing business. To prepare for them, follow these six tips, and do your best to anticipate your expenses and budget for the unexpected.