Some say that the only constant in owning a business is change. Expect the unexpected when it comes to expenses so you can be prepared financially. There will still be some surprises along the way, as we’ve learned painfully in the past few years, but there are a variety of ways you can mitigate the risk of unexpected business expenses.
1. Build an emergency fund
Cash in the bank is one of the best defenses against unexpected business expenses. It’s recommended that a company set aside a certain percentage of sales revenue each month to build a cash reserve. That’s not easy to do when you’re in the startup phase or struggling through tough economic periods, but it should be a priority. You may not even need a separate savings account––good business checking accounts come with features like sub-accounts, which let you keep money separate for different types of expenses.
2. Keep warranties up to date
A repair bill that is not covered by a warranty on your equipment should never come as a surprise to the business owner. Make sure all warranties are up to date and take out extended warranties on equipment that you intend to keep. Hoping nothing goes wrong is not a business strategy. It’s better to protect yourself by making sure all equipment is under warranty.
3. Open a credit card account just for emergencies
Paying cash for unexpected expenses isn’t always possible. Using the primary business credit card to cover them could put a strain on cash flow and limit expenses. Opening a secondary credit card account, reserved strictly for emergencies, is one way to solve that problem. Using it creates an additional liability, but that’s better than not being able to meet the expense.
4. Apply for a business line of credit
An unexpected expense isn’t always a bad thing. Some surprise expenses are opportunities, like a chance to boost spending on a hot new product line. That’s a scenario where a business line of credit might be a better option than paying cash or using your emergency credit card. Lines of credit can be more flexible, they replenish as you make repayments, and you typically only pay for what you need.
5. Upgrade equipment before it breaks down
While reviewing financing options, it’s usually a good idea to assess your equipment and the likelihood of it breaking down at some point. Older office equipment, particular computers and electronic devices, is cheaper to replace than to fix. Being proactive in this area can eliminate unexpected repair costs that come with keeping equipment past its expiration date.
6. Check your insurance policies
This is a preventative measure like checking your warranties. Insurance is peace of mind. It’s one of the best protections against the unexpected and something that should be reviewed regularly to make sure you have the right coverage. That includes medical insurance. Hospital and doctor’s bills quickly add up when you don’t have the right insurance.
7. Review vendor and supplier agreements
Minimum order requirements (MOQ) and on-demand payment terms constrict cash flow and make it difficult to adapt when economic circumstances change. Review your vendor and supplier agreements. Make changes to create flexibility in your finances and the way that you order materials and supplies. This will come in handy when the unexpected happens.
The bottom line: Due diligence can prepare you for unexpected expenses
All these suggestions boil down to one simple mindset. Getting caught short on unexpected expenses can be prevented by due diligence. Check your financing options, warranties, insurance, and the status of your equipment. These are the areas where a small business is most vulnerable. Address those and you should be prepared for just about anything.