Unexpected expenses can cripple a business. They can also create havoc in your personal life if you are not prepared. The number one cause of small business failure is poor cash flow. When cash flow dries up, a business can’t pay their creditors. Before long, bills are piling up and everything implodes. You can’t always prevent unexpected bills from landing on your mat, but you can put in a few layers of protection to ensure you survive the drought.
One of the fundamental skills all business owners need is a firm grasp on the finances. It doesn’t matter how amazing you are at making sales or PR, if you don’t have control over your business income and expenditure, it won’t be long before things begin to slide.
It is very important that you understand how business finances work. Simple skills like reconciling the accounts and balancing a cheque book are all important. You don’t need a degree in accounting or a good understanding of tax law. After all, that’s why you pay an accountant. But it is really helpful if you understand bookkeeping and you know how to draw up a profit and loss account.
Learning to delegate is a useful skill, but the business finances should always be overseen by you. By all means hire staff to input the sales ledger and keep up to date with the bookkeeping, but make sure you know how much money you have in the bank, what expenses are due, and how healthy the cash flow is.
Cash Flow Forecasts
Cash flow forecasts are critical. They tell you what income you can expect to earn in the next X months, and also what expenditure is due. The more organised you are, the easier it will be to stay in control when a sudden bill appears out of nowhere. Try to look ahead and plan for every eventuality. Make a note of irregular expenses and put them in your diary, so they don’t take you unawares. Examples of irregular expenses include vehicle tax and MOT, insurance renewals, and Christmas party costs. These may only happen once a year, but you do need to plan ahead to ensure you have enough money in the kitty to cover them.
Accounting for Unexpected Expenses
Unexpected expenses are in a different category. These are the kind of expenses that you can’t predict. At home, a broken boiler or deceased car would fall into this category. You know this event might happen one day, but you pray it won’t. In business, unexpected expenses include bills for damaged machinery, a cyber attack on your network, or the cost of a plumber to fix a blocked toilet.
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On their own, any one of these expenses could cause you problems if you are completely unprepared but imagine how disastrous it would be if you were hit by all three, and then HMRC sent a letter saying you didn’t pay enough VAT last year – please pay up immediately. It would not be a fun day.
The good news is that you can prepare for such eventualities. All it takes is some forward thinking and a few contingency plans in place.
With many savings accounts paying less than 0.25% in interest, savings are not much of a priority for many people. But this is a huge mistake. We all need savings. In your personal life, it is sensible to have at least three months’ worth of income set aside. In your business, you will need considerably more.
Try and set aside money when things are going well. Rather than taking all your excess cash out of the business, leave as much as you can in there. Channel it into a savings account so you can access it if needs be. Just because you can pay yourself a handsome dividend, it doesn’t mean you have to. If an unexpected bill crops up and you don’t have enough money in the current account to pay for it, borrow from your savings.
Maintain a Business Overdraft
Overdrafts are expensive, but they are a necessary evil. A decent overdraft facility will prevent unauthorised overdraft fees from crippling the business. Speak to your business advisor at the bank if you don’t have an overdraft set up. You don’t have to use it, but it might come in handy one day.
Business Credit Card
Credit cards are an expensive way to borrow money, but they are handy if you need to settle a bill and you don’t have the ready funds to do it. A credit card gives you up to 60 days interest-free credit, so you can delay paying the expense. However, if you don’t settle the balance within the interest-free period, you will be hit with interest rates of around 20% APR.
For large bills, the most cost-effective solution may be to borrow money to settle the bill. This is better than taking money out of the company pension scheme or delaying the payroll for a couple of months. People often resort to high-cost short-term credit to cover unexpected bills, but this isn’t always the best idea (see this index from Cash Lady to see the stats). While short-term loans are OK if you can afford to repay them fast, you are better off with a cheaper business loan if you need to borrow the money for longer.
Invoice factoring is a useful way to raise cash if your problem is late paying customers. Borrow money against an unpaid invoice and use this to settle your bill. There will be a fee, but if you are caught in a tight corner, it’s an option.
Never ignore an unexpected bill. Bills do not go away. Paying bills early often attracts an early settlement discount, but if you are having problems and none of the above solutions help, talk to your creditor and see if you can negotiate a payment plan. Most creditors would rather have the money repaid over time than not at all.