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Friday, November 1, 2019

Unexpected Business Expenses 101

When running a business, the majority of the expenses your company will incur are expected. You can, for example, plan ahead for fixed costs such as electricity, your premises rent or mortgage payments, staffing costs, and so on. While there may be small changes between the exact amount owed each month, the costs are generally fairly consistent.

For a business owner, the fact that most of the business’ expenses are expected is a very good thing. Payments can be budgeted for; the costs of the business can be met; and the business can continue to function exactly as one would hope. When it comes to outgoings, expected, predictable, regular expenses are always going to be preferable.

Unexpected expenses, unfortunately, exist. These are expenses that appear often without warning or notice, which means there is no opportunity to include them in the standard business budget.

The four different types of unexpected expenses
The first type of unexpected expense relates to repairs; when there has been a problem within the business, and funds need to be spent to rectify the issue. Common repairs include storm damage to the business premises, problems with the business’ IT hardware, or machinery or fleet vehicle breakdown.

The second type of unexpected expense is related to bills or invoices that need to be paid as soon as possible. This can mean tax bills, invoices from suppliers, or utility bills. While some of these bills may have been expected in terms of knowing that the bill will arrive, the total amount owed can be far higher than had originally been budgeted for, and thus becomes an unexpected expense.

The third type of unexpected expense is fines, which can mean anything from fines issued by regulatory bodies to parking tickets on company fleet vehicles. Fines can be levied against the business and usually have to be paid within a set period of time.

Not all types of unexpected expenses are unpleasant, however - there is also a fourth type, which is best described as an expense that represents an opportunity. some can be very positive indeed. For example, a sudden invitation to exhibit at a highly prestigious trade show or have the chance to buy an exciting new product that you’re confident will fly off the shelves are amazing opportunities that will greatly benefit your company, but both result in expenses (hiring a display show booth or actually purchasing the stock, for example) that were not initially included in your business’ budget - so they are unexpected expenses.

Nevertheless, even ‘positive’ unexpected expenses are problematic for business owners. When you become aware of the expense, the situation is clear: you now must find funds from somewhere in order to meet a serious business need.

What happens if an unexpected expense is not paid?

The impact of not being able to pay an unexpected expense can be significant.

  • If the expense was related to some kind of repair or maintenance work that has yet to be completed, then this work goes undone - which can greatly hamper a business’ ability to function as would be hoped, or in the worst case scenarios, may make it impossible for the business to function at all.
  • If the expense is a bill or invoice, then it has to be paid, or there is a risk that debt recovery action will be initiated by the issuing party. Debt recovery action can lead to extra charges being added, which exacerbates the situation even further, and can end up requiring (often expensive) legal action to resolve.
  • Fines are also subject to similar consequences to bills or invoices; the amount owed will usually be increased if payment is not received within a certain time frame and, in the worst case scenarios, legal action could be pursued against the business.
  • Finally, if the unexpected expense relates to a positive opportunity, then not being able to embrace that opportunity can be detrimental to the future health and success of the business.

It is clear, then, that not paying an expense isn’t an option, so…

What should you do next?

We’ve established that an unexpected expense should be met, but how this can be achieved is a much more significant consideration.

The first option to consider is whether you have any cash reserves in your business. If so, then making a withdrawal to cover an unexpected expense is a sensible choice; you can then pay the funds back to your reserves from your normal business budget at a schedule that suits you.

If you do not have business cash reserves, then you are far from alone. Cash reserves may be preferable, but they are far from the ‘norm’; some companies do not have reserves at all, while others may have a small amount set aside, but this is not necessarily enough to completely cover an unexpected expense. If either of these circumstances apply to you, then you will need to investigate other options for settling the expense.

How can an unexpected expense be paid without cash reserves?

You could consider asking the owed party if you can negotiate a payment plan of some sort. If agreed, you can simply add the monthly amount to your usual business budget, and then make the payments accordingly until the full amount is settled.

The above route, however, is fairly unusual, and in many circumstances will be unavailable - for example, if you need to repair a fleet vehicle, then the auto shop will need the bill to be settled quickly so that they can meet their financial responsibilities, so a long-term payment plan is unlikely to be an option. It’s always worth asking the question whatever expense you’re trying to cover, but it’s also sensible to think about alternative options.

For most businesses, some form of credit will be necessary to meet the expense, and there’s a few options to consider. You could consider loans, credit cards, or options such as a merchant cash advance if you take card payments from your customers in order to access the funds required. You can then ensure that the funds are used to meet your unexpected expense accordingly.

Can unexpected expenses be entirely prevented in business?

It would be nice to think that it is possible to completely remove the possibility of unforeseen expenses from business - but unfortunately, doing so simply isn’t possible. Unexpected expenses can, and do, just happen to businesses, and there’s no way to 100% prevent them.

However, just because it is impossible to completely prevent these expenses, that’s not to say there aren’t a few things you can do to make them significantly less likely, or to prepare your business to deal with them when/if they arise. Here are a few suggestions you may want to keep in mind:

#1 - Build a cash reserve
As discussed above, cash reserves can be a great go-to for any unexpected expense, so it can be helpful to add an amount to your standard budget to help build-up a reserve that can be used if required. It is generally recommended that businesses have enough cash to sustain six months' worth of operating costs, though of course any amount of cash reserves will always be beneficial.

#2 - Consider repair plans
Repair plans work in a very similar way to standard domestic insurance: you pay a small amount per month to cover a certain aspect of your business (such as IT hardware or your fleet vehicles) and, if a problem develops, it will be fixed for free. While these types of plans do not necessarily save you money, they do help to prevent a situation where you suddenly need to find the funds for a crucial repair.

#3 - Conduct regular maintenance work
One of the best ways of preventing the need for repair work is to make sure all equipment, building, and vehicle maintenance work is completed on time, every time. While consistent maintenance can never be sure to prevent breakdowns entirely, it should make them a lot less less likely.

#4 - Hire an accountant to complete your taxes
Tax bills are one of the most serious types of unexpected expense so, to avoid this issue entirely, always hire an accountant to compile and file your taxes so that you can avoid any surprise bills or penalties.

#5 - Keep up to date with all local and federal laws
Avoiding a fine-related unexpected expense means regularly checking to see if any regulations or laws pertaining to your business have changed. Such changes can often be very quick and made with little fanfare or announcement in the general press, so consider subscribing to trade-specific newsletters or websites; this should make it more likely you’ll be made aware of any important updates that you will need to take action.

To conclude

We hope the above guide will prove useful, helping you and your business to manage unexpected expenses and potentially even prepare for them in time. After all, the speed at which business moves means it is important to know how to cope with expenses that suddenly appear from nowhere, and to do all you can to prepare for such eventualities, too.
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