Now that you have successfully got your business up and running, it’s time to consider if you’ve covered all your bases. A lot of businesses fail to predict and prepare for emergencies and unexpected expenses. If you are a fairly new entrepreneur the following list will help you know which unexpected business expenses you need to look out for in order to avoid some common business failures.
What are some common business expenses?
The first step towards having a clear understanding of your budget is to know your expenses. There are different types of expenses in a business which can be categorized into four distinct ways.
1. Fixed Expenses
These are the kind of expenses that you would think of when drafting a budget. They are standard expenses of fixed amounts that are expected to occur every month, on fixed days. Utility bills are these kinds of expenses.
2. Recurring Expenses
These are also considered as day-to-day expenses or purchases that happen throughout the month. They differ from fixed expenses in that they are not fixed in terms of their dates or amounts, but they do reliably happen. Gasoline bills for the company vehicles will come under this category.
3. Non-Recurring Expenses
These are expenses that may only happen a few times in the year but can be of substantial amounts so should not be forgotten. Registration fees and insurance policies will come under this category as will annual or semi-annual purchases
4. Unpredictable Expenses
As the name goes, these are expenses that are unpredictable, you don’t know when they will happen or what it will cost you. These are emergency expenses.
What are examples of unexpected business expenses?
Businesses should be prepared to handle unexpected expenses on a regular basis. These expenses should not compromise the payments for necessary operations. These are some of the common unexpected expenses business owners need to prepare for.
1. Paying Taxes
While most business owners know that they need to file taxes, they are often surprised with the amount when tax season starts. Every small business owner needs to understand the different components of their company’s taxes and keep enough capital aside to cover those expenses prior to tax season. Consider federal, state and local income taxes as well as those specific to your business. A finance professional will be able to help you determine the amount you need to set aside for taxes.
2. Equipment Breakdowns
Equipment breakdown is inevitable yet often overlooked by businesses. Depending on your type of business, the equipment that you use could be expensive to repair. Especially if you cannot afford to have breakdowns in your operations. Funds need to be set aside for possible equipment malfunction and failure. If that is not possible make the proper arrangements for fast business loans.
3. Employee Benefits
Business owners often forget to add employee benefits and perks to their expense projections. This could include compensations, bonuses, health care, vacation time and retirement. These expenses may not seem like a large amount when you have a few employees but will add up to a substantial amount when your company grows and needs to be factored in and prepared for.
4. Business Insurance
Business owners know that they need to purchase business insurance. What many forget is that if their company has rapidly grown, then they have to acquire additional insurance. A business owner operating out of a residence will not need as much insurance as one who owns a larger establishment and manages factories, production units and warehouses. Besides general liability insurance, you will need to invest in workers compensation and medical insurance.
5. Utility Problems
Another common expense that business owners fail to prepare for is utility problems. These costs include electricity outages, internet failure, plumbing issues and the like. Although they might not always incur large sums of money, sometimes they can be financially demanding and need to be fixed immediately. Especially when a delay can result in losing customers. Prepare for this unexpected business cost else you will land up paying for an expensive quick business loan.
6. Professional Service Fees
A growing business will mean that at some point you will not be able to manage everything on your own and will need to delegate or outsource to professional services. This can include attorneys, HR and accountants. The costs can get expensive if you have not made provisions for them. They are however worth the expense as it will free up your time to deal with the growth and operations of your business.
How should I budget for unexpected business expenses?
1. Have An Emergency Fund
Allocate the worth of several months of expenses into an emergency fund. Set aside these funds for emergencies. This fund ensures that you don’t have to borrow money at a high rate of interest when you need to deal with an unexpected expense. This money can be used when business opportunities turn up.
2. Plan Ahead
When making a budget plan for events that could possibly arise. Don’t be caught off guard by expenses when they come up. For example, if you have a company car, factor in tire changes as an expense. There are various software tools that are available online that can help you plan ahead.
3. Credit Score
Your credit score is an important aspect of your business. There may be times when you need to borrow money to expand or deal with unexpected business expenses. A high credit score shows your banks that your business is good with money and can be trusted. A high credit score may also earn you a lower interest rate.
4. Budget For The Unexpected
One of the best ways of dealing with unexpected expenses is to plan ahead for them. Set aside a percentage of your budget for such eventualities. For example, you can allocate one per cent of all sales to this reserve fund. Over time this can add up to a substantial amount and help you pay off any issues quickly and easily.
In order to prepare for unexpected business expenses, you need to list the possible emergencies that you can expect to occur in the course of a year. Preparation for these expenses can go a long way in growing your brand effectively. If yours is a business that needs fractional accounting and CFO help, we at Accounovation are passionate about helping our clients grow profitably. We also provide businesses with a complete fractional accounting team for the price of a full-time bookkeeper. Get in touch with us at Accounovation.com for a free consultation on how we can assist you with accounting services.