There is an old Dilbert comic where long-suffering Dilbert has completed a budget, and the boss asks why he budgeted a 10% contingency fund. Dilbert replies that it is for unexpected costs. The boss tells him to go away and give him a solid figure for unexpected costs. So, Dilbert composes the detailed cost of a dragon attack, and the cost of fire-guarding the building. The point being that unexpected costs cannot be planned for, they can only be reacted to. Yet, there are several things you can do to lower the risk of unexpected small business costs.
Invest in Health and Safety at the Workplace Training
Perhaps one of the easiest ways to reduce your number of unexpected costs is to train your staff more thoroughly with health and safety at the workplace courses. Not only will this help to prevent injuries and their inevitable court cases but will also help your insurance costs over the long run since you will be making far fewer claims.
Secure Contracts for Long Term Prices And/or Credit Interest Rate
Suppliers of your goods and of your debt are able to affect your monthly and annual budget overspend with the mere movement of a number. If you are a strong customer of either your supplier or the company giving you credit, then work towards securing long-term prices and interest rates. That way, any changes in price will not be unexpected, and you will be able to plan for the inevitable renegotiation when the contract ends.
Change How You Manage Your Balance
Sometimes, unexpected business costs arise because you went overdrawn. Sadly, if you ask your bank to remove things like unplanned overdrafts, they will refuse. The best-case scenario is that they agree, but they severely limit the number of ATMs you are allowed to use. In most cases, they will not remove the unplanned overdraft feature, which means they will happily allow you to keep going overdrawn and accruing interest and added costs.
Going overdrawn by accident is a frequent cause of unplanned expenses for most businesses, so change the way you pay for things. Your direct debit payments are expected, but a mix up between those and your regular expenses may cause trouble. Ergo, have a bank account that is solely used for direct debits and nothing else. Have another bank account, and maybe even another bank for business expenses, petty cash, and so forth.
Another thing you can do is put limits on how much staff can spend per purchase and have things like fuel cards for drivers so that any overspend is quickly caught and managed. Perhaps try giving your employees prepaid debit cards so that they can only spend what is loaded into the card by you. That will stop unplanned overdrafts and may be a good way to keep them to stick to their budgets.
Buy in Bulk and Track Prices
Planning is one way to reduce unexpected small business costs. If you have the chance to buy in bulk, then it may help lower your business operational costs, and may help reduce the damage caused by supply interruptions.
For example, if you have a stockpile of rubber for your mold making business, then things like missed deliveries of supplies, or damaged/returned devilries, stolen deliveries, or sudden cost spikes for deliveries will affect you. The short-term problems that would otherwise cost you extra money will not cost you anything more than you would normally expect to pay.
Track Expenses And Maybe Outsource Some Functions
Let’s say that you keep having to pay extra staff to complete your bookkeeping. Perhaps there are good reasons why your bookkeeping work seems to balloon one month and dry up the next. Perhaps there are unexpected peaks and troughs in your business, or in your operations.
Nevertheless, let’s say that you are tracking the costs of your accountancy department, and the cost of hiring temp staff all the time is becoming crippling. In this case, why not outsource the accounting process completely. That way, you get a consistent figure for your function rather than having to pay unexpected expenses all the time.
Final Thoughts – Have a Contingency Fund as a Buffer
Dilbert was not wrong to add his 10% contingency fund. It often helps to have a buffer but understand that the buffer is not a guard against a project going wrong. A buffer allows you to spend money quickly in order to fix a problem. It is not a projection or something you need to narrow. Your contingency fund is quick money that you can access to mitigate the damage of unexpected events and expenses. You should probably have a contingency fund if you are running a small business or are working on a difficult project because it can sometimes stop unexpected expenses from becoming more costly due to delays.
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Chris has served as a business advisor to a big list of small and micro businesses; localized businesses and social enterprise in particular. Chris is also an avid reader and loves to stay updated about latest tech and innovation.