In life, you will always encounter some sort of unexpected expenses.
These expenses could be from car damage, an urgent doctor’s appointment, or shelling out a lump sum to pay for a home repair. While spending money to take care of the issues isn’t always fun, it’s a necessary evil and something we know will happen at one point or another.
And for small businesses, the same principle applies – there will be times when expenses pop up and they may be completely unexpected and most likely, unappreciated. That’s because even the smallest of unexpected expenses can cause a big disruption in cash flow and create a web of effects that touches all aspects of the small business.
So for small business owners, one thing financial planners will always stress, is to make sure you have an emergency fund for unknown and unplanned business issues that will happen. The goal is to ensure these issues can be addressed straight away and cause the least amount of disruption to your business. The less disruption, the better the chance of minimal fallout and a successful bounce back.
While it is not always feasible to save, save, save, there are a few expenses for which you can consider keeping a fund. These are some of the most common unexpected expenses small business owners may face at any stage of their development.
- Legal issues. While most who start businesses don’t seek a ton of legal counsel early on, there is always the possibility that legal services will be needed down the road. These expenses could be positive, such as filing for trademarks or patents. Or they could be less exciting expenses such as lawyer fees for responding to a lawsuit or having to file a lawsuit for myriad reasons. As a general rule of thumb, figure that you may need somewhere between $1000 and $5000 in a “legal fund” just in case you run into any of the aforementioned issues or if you want to expand your portfolio through other intellectual property investments that require a sense of urgency.
- Unknown tax payments. Yes, all business owners should know that they need to pay taxes (because that’s always a sure bet), but some may not understand the ins and outs of local or privilege taxes that may be applied based on where the business is located and/or where it performs business. Be sure to understand all of your required tax payments, business license fees, and anything else that you will need to pay to ensure your business complies at the federal, state, and local tax levels.
- Equipment and repairs. While we like to think that any equipment or software investment made up front will not require an additional spend, there may be issues where equipment malfunctions or software changes its structure and upgrades (read: additional payments) are required. If your business requires pricey equipment or software to run smoothly day-to-day, be sure you have a fund to help with anything that may need immediate attention if something isn’t working properly or requires a newer version. If you do find yourself in a situation where equipment malfunctions and needs attention, be sure you have a plan. If you may need access to funds, be prepared and know if your bank offers immediate leasing or other loan options. Some small (usually local) banks offer options for small business owners that can assist in these tight turnaround situations (e.g., providing immediate notification or approval and release of funds) and save you from experiencing a disruption in your operations or loss of business.
In general, small business owners with small budgets require wise spending habits at all times. However, understanding when and why taking a risk may be a great strategic move is also important. Arm yourself by knowing ways to navigate the unexpected so you can be a more prepared business owner with backup plans that take you midway through the alphabet.
Plan for the unexpected – that’s winning.