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How can your small business prepare for unexpected expenses?

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Unexpected expenses can hit your small business hard, especially if you don't have a plan to deal with them. Whether it's a sudden repair, a tax audit, or a pandemic, you need to be prepared to handle the financial impact and keep your business running smoothly. Here are some tips on how to prepare for unexpected expenses as a small business owner.

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Heather Townsend

Giving clients & members the clarity & confidence to grow their practice | How To Make Partner | The Accountants'…
Pinki Dodhia

Wealth Manager | Financial Planner | Content Writer |
Frank Mckissick

Accountant/Business Analyst I am the Owner/Operator of a "full-Service" Accounting/Tax Preparation for small to…

1 Build an emergency fund

One of the best ways to prepare for unexpected expenses is to have an emergency fund that can cover at least three to six months of your essential operating costs. This can help you avoid taking on debt, dipping into your personal savings, or cutting corners on your quality or service. To build an emergency fund, you need to set a realistic goal, track your income and expenses, and save a portion of your profits every month. You can also look for ways to reduce your fixed costs, such as negotiating with your suppliers, switching to cheaper utilities, or downsizing your office space.

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Pinki Dodhia

Wealth Manager | Financial Planner | Content Writer |
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1. Firstly, one will have to calculate the extent of unexpected expenses that may crop up once in a month or a quarter 2. Secondly, keep aside a share of profits in a reserve account every week or fortnight 3. This money can be invested in short term funds so that they earn a return and are not lying unused

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Frank Mckissick

Accountant/Business Analyst I am the Owner/Operator of a "full-Service" Accounting/Tax Preparation for small to medium-sized businesses and Individuals
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We were taught from my days in college some 49 years ago was to establish a "rainy day" fund to cover unexpected expenses! you will never know when they will hit! Call a slush fund or a emergency fund to cover what is not covered in the budget in case when something goes wrong, and believe me, it will! Put this money aside in the fund, and do not touch it, because if you do then you will defeat the purpose of having it!

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SVET Svitlo

Angel Investor , (20+ years), Serial Entrepreneur (14+ companies with > $100M cap), Author (> 1M views), Lived in 40+ countries, the Founder of Evernomics, Crypto Influencer (since 2014),
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Small businesses can prepare for unexpected expenses by creating an emergency fund, which is a dedicated amount of money set aside specifically for unplanned costs. Regularly contributing to this fund can help businesses deal with sudden expenses without disrupting their operations. Businesses should also have a comprehensive insurance plan to cover potential damages or losses. Regular financial forecasting can help predict possible future costs. Keeping a close eye on cash flow and regularly reviewing budgets can also alert businesses to potential financial issues before they become problematic. Lastly, maintaining good relationships with lenders and creditors can make it easier to negotiate terms or secure loans if necessary.

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Steve Baker

Independent Financial Adviser CALFBF
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I agree with some of the comments already made, I would add that its good practice to go through a budget planning exercise with a good planning sheet to accurately determine your true monthly expenditure and gradually build up 3 to 6 months cost of living and hold in an easy access account. If you dip into these funds remember to top up ASAP Also arrange an overdraft facility even if you don't use it at least its there to fall back on.

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2 Review your insurance coverage

Another way to prepare for unexpected expenses is to review your insurance coverage and make sure it matches your current needs and risks. Insurance can protect you from losses due to accidents, theft, lawsuits, natural disasters, or health issues. However, insurance can also be expensive and complicated, so you need to shop around for the best rates and policies, and read the fine print carefully. You should also review your insurance coverage at least once a year, or whenever you make significant changes to your business, such as adding new products, services, employees, or locations.

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Heather Townsend

Giving clients & members the clarity & confidence to grow their practice | How To Make Partner | The Accountants' Growth Club | Slayer of tradition
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Having good insurance always helps. But think about whether the cost of claiming on the insurance may be more expensive in the long run. I.e. when your excess and then higher future premiums are taken into account.

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3 Create a contingency plan

A contingency plan is a document that outlines how you will respond to various scenarios that could affect your business, such as a fire, a cyberattack, a supply chain disruption, or a market downturn. A contingency plan can help you identify the potential threats and opportunities, assess the impact and likelihood of each scenario, and define the actions and resources you will need to cope with them. A contingency plan can also help you communicate with your stakeholders, such as your customers, employees, suppliers, and investors, and maintain their trust and loyalty.

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Joshua Bloom

Audit Director | Manufacturing | Not-for-Profit
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You need a contingency plan. Especially if you work with others, you everyone needs to know what to do when something inevitably happens. Especially since a cybersecurity incident is not a matter of if but a question of when.

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4 Diversify your income streams

Diversifying your income streams means finding different ways to generate revenue from your business, such as offering new products or services, expanding to new markets or niches, or creating passive income sources. Diversifying your income streams can help you reduce your dependence on one or a few customers, increase your customer base and retention, and leverage your skills and assets. Diversifying your income streams can also help you cushion the impact of unexpected expenses by providing you with more cash flow and flexibility.

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Heather Townsend

Giving clients & members the clarity & confidence to grow their practice | How To Make Partner | The Accountants' Growth Club | Slayer of tradition
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Having 2 different income streams that are not dependent on each other is a must. Particularly if one is popular when the other isn’t.

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5 Monitor your cash flow

Cash flow is the amount of money that flows in and out of your business over a period of time. It is crucial for your business survival and growth, as it determines your ability to pay your bills, invest in your business, and deal with unexpected expenses. To monitor your cash flow, you need to keep accurate and updated records of your income and expenses, and use tools such as cash flow statements, budgets, and forecasts. You also need to analyze your cash flow regularly, and identify any gaps, trends, or issues that could affect your financial health.

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6 Seek professional advice

Preparing for unexpected expenses can be challenging and stressful, especially if you don't have the time, skills, or knowledge to manage your finances effectively. That's why it can be helpful to seek professional advice from experts such as accountants, financial planners, lawyers, or mentors. They can help you plan your finances, optimize your tax situation, protect your legal rights, and access funding opportunities. They can also help you avoid costly mistakes, and provide you with valuable insights and feedback.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can your small business prepare for unexpected expenses?

1

2

3

4

5

6

7

1 Build an emergency fund

2 Review your insurance coverage

3 Create a contingency plan

4 Diversify your income streams

5 Monitor your cash flow

6 Seek professional advice

7 Here’s what else to consider

Small Business

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How can your small business prepare for unexpected expenses?

1

2

3

4

5

6

7

1 Build an emergency fund

2 Review your insurance coverage

3 Create a contingency plan

4 Diversify your income streams

5 Monitor your cash flow

6 Seek professional advice

7 Here’s what else to consider

Small Business

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