You’ve spent hours preparing your business budget, making sure all of your regular costs are included. You’ve even gone one step further by adding in an increase for next year. When your accounting software produces your financial statements and projected budget, you breathe a sigh of relief, happy that the process is over.
Or is it?
Will your budget hold up, or will Murphy’s Law kick in? If you’re not familiar with Murphy’s Law, it guarantees that if you budget for 20 expenses, the only one you’ll incur will be the one you didn’t budget for.
While there’s virtually no limit to the number of unexpected expenses your business may be affected by (just what you wanted to hear), there are some unanticipated expenses that may affect businesses more frequently than others. Check out these 10 examples and start planning accordingly.
1. Equipment failure
Mike owns a facility that offers indoor sports, such as basketball and volleyball. However, the majority of Mike’s revenue comes from the ice skating rink, only one of three in the entire region. Although Mike has consistently budgeted for repairs to the rink itself, he did not budget for repairs to the compressor, which went out one Friday night during a free skate. The cost of replacing the compressor: $30,000.
Not only does the $30,000 eat into Mike’s carefully crafted budget, but it impacts his income as well since the majority of his revenue comes from skaters. Better budgeting would not solve this issue, but an emergency fund might. Even more helpful would be a line of credit from Mike’s bank that he could use for an emergency such as this.
While it’s relatively easy to estimate the amount of taxes you’ll have to pay, there’s always a chance that your estimate will be wrong. It’s also possible that you’ll be audited. And even if the audit finds no additional taxes are owed, the expense of paying for a CPA or tax attorney to assist with the audit can wreak havoc with your budget.
For example, David owns a small flower shop. When he filed his tax return at year-end, he made a mathematical error when entering his business expenses. This attracted the attention of the IRS, which decided that David’s business should be audited.
Like most business owners, David knew next to nothing about taxes and enlisted the help of a CPA who could help him address the IRS’s requests. Over the next six weeks, the auditors looked at just about every one of Dave’s invoices, checks, receipts, income statements, and bank deposits for the past two years. They concluded nothing was owed.
However, David wasn’t so lucky because he now owed his CPA more than $4,000 for his hours of help. While there’s no way to predict whether you’ll be unlucky enough to be audited, or sued by a customer, be sure to build professional services fees into your budget. Hopefully, you won’t have to tap into them.
3. Supplier cost increases
When you sell a product, you should always factor in the cost of the supplies needed to produce your products, Whether it’s wood to create rocking chairs or finished products that you’re purchasing for resale, supplier cost plays a major role in your cost of goods sold, and ultimately how much you earn on each product.
Let’s say you’ve always gotten your supplies from Val’s, which offered the items you needed at a reasonable cost. However, you received a letter in the mail yesterday informing you that Val’s will be raising its prices by a whopping 30% next month.
Unexpected price increases are difficult to predict. Building in an annual increase in product costs can help, but they do nothing to cover a mid-year price increase. You can start looking for a new supplier, but you’ll still need to find a way to absorb the price increase from Val’s, at least temporarily. You may also need to increase your pricing to cover some of your additional costs.
Insurance costs usually remain fairly consistent, making them easy to budget for by simply building in an annual premium increase. That’s unless you have a claim.
When the roof of Jill’s restaurant was damaged earlier in the year by a tornado, she put in a claim with her insurance company, which covered the cost of repair. Jill was happy with the service and the prompt attention the insurance company gave her until it was time for her policy to renew.
Her yearly premium had increased by almost $1,600, or an additional $133 a month. Had business been at normal levels, Jill could have easily factored in the extra expense, but with business down, she was losing money each month and was not in a position to add anything more.
When completing your budget, always build a price increase into non-variable costs. It may not be able to cover the entire increase, but you’ll still be in better shape financially.
5. Increased rent
If you own the building that your business is in, you won’t have to worry about an unexpected increase in your mortgage. But for those of you who rent, there’s no way to predict how much your rent increase will be.
Debbie rents a small office where she practices law. Debbie doesn’t know that her landlord recently sold the building until it’s time for her lease to be renewed. To her surprise, the new landlord is asking for almost twice as much, hiking her rent from $1,100 to $2,000 a month.
Debbie has two choices. She can accept the new rent amount, or she can move. Either option will cost her money that she did not have budgeted, so it’s up to her to figure out which one will cost less.
In this case, having an emergency business fund handy would be helpful for Debbie, allowing her to make the best choice for her business, rather than simply paying the increased rent.
6. Office equipment
Your computer crashes. Your copier stops copying. Your printer decides to spew ink at everything in sight. These are just some of the issues that can arise with aging office equipment. While the cost to replace a desktop computer is minimal, new copier and printer costs can seriously impact the budget of a small business.
If your equipment is aging, the best thing you can do is budget it into your upcoming expenses and replace it before it crashes. And if you’ve budgeted in additional employees for next year, be sure to include the cost of providing them with the equipment they’ll need to do their job.
If you offer benefits, such as health and dental insurance, to your employees, you’re likely including a yearly premium increase in your budget. But that might not be enough.
When Kate started offering her employees health insurance, she was paying the entire cost. But as the years went by, she started shifting more of the cost to her employees. Even so, when she received her renewal notice, her premium had risen by more than 40%, putting the cost out of her reach.
Because enrollment had already ended, and employees had signed up for the insurance based on the amount she had previously withheld plus 10%, it was too late to increase the employee percentage paid, so Kate had to scramble to find a way to pay the additional cost of the premium.
By reviewing insurance options earlier in the year, you’ll have plenty of time to notify your employees of any changes for the upcoming year while also eliminating the threat of unplanned expenses.
8. Delayed payments
Your anchor client always pays you on time. Except now because they’re filing for bankruptcy. And if you’re lucky enough to be included in the bankruptcy settlement, it will be a fraction of what they owe you, and you’ll likely not see that for months, if ever.
It’s hard to run a business when you count on one customer to provide the majority of your income. What happens to you if something happens to them?
While a delayed payment is not a cost, it can be just as impactful to your business. Make sure that when you’re budgeting your expenses for the year, you’re not being too generous with revenue totals. Increasing your customer base would also be helpful.
If you have a large staff, your illness or that of a key employee will likely be a temporary inconvenience. However, if you’re the only employee, that changes. Being out of commission for weeks at a time can seriously impact your business. The situation becomes even more dire if your business is the primary source of income for your family.
Stephanie owns a small nail salon where she employed two part-time nail techs. One evening, on her way home from the salon, Stephanie was in a bad car accident and was unable to work for six weeks. While her two techs tried to fill in as much as possible, the business lost a significant amount of sales revenue. In this instance, having an emergency fund or a line of credit would have been extremely helpful to see the business through a rough patch until Stephanie could return to work.
10. Damaged inventory
When Cara started designing steampunk necklaces, she never dreamed that her business would take off. She had a week’s worth of orders she couldn’t fill because she was waiting on an inventory shipment. Unfortunately, the inventory she was waiting for was damaged during shipment, putting her even further behind than she already was.
When Cara told her customers that the wait time for a necklace was now four weeks instead of one, many of them canceled their orders, costing Cara a lot of money.
Though unpredictable or damaged shipments are not in your control, having extra funds available to get through a temporary downturn would be extremely helpful. It might even be the difference between Cara’s business experiencing a temporary setback or ceasing operations altogether.
You can’t predict disasters, but you can plan for them
No matter how savvy you are about business, you can’t predict that you’ll be in a car accident on the way home. You can’t predict that the shipping company would damage your order, or that your biggest customer would unexpectedly file for bankruptcy.
But there are ways you can protect yourself against unforeseen expenses. Starting an emergency expenses fund or obtaining a line of credit from your bank can go a long way toward being able to manage unexpected bills. While extra funds may not prevent disaster from striking, it can help your business survive whatever life throws at it.