How to prepare for unexpected expenses in business

1. Critical equipment failures – Repairs and replacement

Working equipment is crucial for any business. For instance, imagine you're running a coffee shop, and your espresso machine breaks down, or perhaps you own a local moving company and one of your trucks is suddenly out of commission or your business falls in trouble due to a computer crash. Over time, equipment and vehicle parts eventually break down and require repair or replacement. These unexpected bills can be costly, but if your business cannot operate without the equipment, it's not an optional expense.

2. Rising supply costs

Chances are your supplies cost more today than they did last year or even last month. While you can shop around for the best prices, you may need to pay a higher amount and adjust your budget accordingly. These price increases can be difficult to predict, but having open conversations with your suppliers can help you plan ahead.

Consider increasing your own rates to recoup the difference and manage supply-related expenses effectively.

3. Professional fees

As a small business owner, you excel in your line of products and services. However, when it comes to filing taxes or handling legal issues, using a professional, such as an accountant or lawyer, can be a smart investment for your business to help protect against the unknown challenges.

Professional fees can get expensive, but they can add a layer of preparedness and prudence to your business.

4. Employee-related expenses

Payroll is a planned expense in your budget, but hiring and retaining employees can come with unforeseen costs. For instance, you may need to hire a recruiter to help you find suitable candidates, or you may need to provide training to get new employees up to speed on your operations.

Other employee expenses include background checks, benefits and equipment in addition to their wages. These costs can add up especially if you didn't plan for them.

5. Shrinkage-related expenses

According to National Retail Federation, the total shrinkage in 2022 represents $112.1 billion in losses, a significant increase from $93.9 billion in 2021.

For instance, restaurants may experience shrinkage due to the expiration of perishable goods or incorrect orders. Offices may see a reduction in supplies such as paper, pens and small equipment like headsets and retail stores might experience shrinkage due to shoplifting, inventory discrepancies, employee theft or supplier frauds. Businesses of all kinds may suffer from shrinkage (loss of products or goods), causing you to restock sooner than you anticipated, adding to your unforeseen costs.

Unexpected expenses for a small business can be challenging, but now that you are aware of them, let's explore some effective solutions.

Create a financial plan to manage unexpected expenses in business

While unexpected bills may arise, you don't have to let them catch you entirely off guard. Once you identify the common types of unforeseen costs, you can prepare by putting funding in place. Here are four easy-to-follow strategies for creating a small business financial plan:

Creating a small business emergency fund

Your first course of action should be to create an emergency fund with money set aside to cover any unexpected expenses in business. A good rule of thumb is to save at least three to six months of your overall business expenses. Having extra funds on hand won't prevent unplanned expenses from happening, but it provides peace of mind and an ability to handle whatever comes your way.

Here are four tips to set up and build an emergency fund.

• Save unexpected income and tax refunds.
• Park your savings in an easily accessible business checking or savings account.
• Reinvest money savings from cost-cutting measures such as automating routine tasks, bulk purchasing, etc.
• Add a line item to your budget for miscellaneous expenses accounting for 20% of your income for unforeseen costs.

Utilize a small business credit card

Building a small business emergency fund is essential. However, sometimes you might not have the necessary funds available, or you need to save them for future expenses. In these times, you require flexible options that readily provide you with the needed funds.

One option is to pay your unforeseen costs with a business credit card. It can be an efficient way to pay for equipment repairs or to cover the rising cost of supplies.

Many credit cards offer low interest rates and rewards such as cash back, which can reduce your overall costs.

Apply for a small business line of credit

Arranging a business line of credit in advance is an excellent way to cover significant unexpected expenses such as crucial equipment repairs or inventory replenishment. It’s an effective tool for managing cash flow swings that your business may experience.

Apply for a small business loan

If you need to replace a piece of equipment or add to your assets due to growth or expansion, you can also consider equipment financing. This type of funding allows you to pay for the item over time with flexible terms.

For larger unexpected expenses in business such as building repairs, technology upgrades and expansion needs, look into getting a business term loan to help fund your capital needs. Your bank can help you apply for an SBA loan with a long-term small business loan partially guaranteed by the government. Empowering your business with a term loan allows for sustainability and growth when these types of costs arise.

In every business, unforeseen costs are inevitable–whether it’s a crucial equipment failure, rising supply costs, employee/ shrinkage-related expenses. These unexpected expenses can quickly disrupt your financial stability if not managed properly. How you tackle these expenses can make all the difference. By setting up an emergency fund, applying for a business line of credit, and considering a term loan or credit card wisely, you can build a robust financial safety net to manage unexpected expenses in your business.