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Preparing for the Unexpected in Your Small Business

A small business typically runs on a tight budget. You have probably created a budget based on known expenses versus expected income. If you’re ahead of the game, you likely have a slush fund stashed away for a rainy day. But what exactly might that rainy day be? Will you be prepared, or could it devastate all you’ve worked so hard to gain?

We all know that financial advisors tell the average person to keep a fund equivalent to at least six months of salary for emergencies. Do you really need to build up savings that equal six months of your business income? The answer is YES.

As a small business owner, you are probably extremely hands on in your business. What happens if you are injured or fall ill? You would need to hire competent people to help out while you can’t do it. Competent workers do not come at minimum wage. You are not a minimum wage employee, and would likely not be comfortable hiring an entry level person to take care of your life’s work.

Other financial disasters can happen as well. A customer could be injured on your premises and attempt to sue for damages. Mother nature could drop eight inches of rain in one day and flood your storage area. Changes in the local economy (a plant shutdown, for example) could dramatically change your ongoing customer base. A competitor could set up shop down the street at prices that you literally cannot match.

So how do you prepare for the unknown? There are a number of ways to get ready for what life throws at you.


Yes, the dreaded insurance premiums. What is necessary, and what isn’t? First of all, liability and workers’ compensation are absolute must-haves. This is not only a suggestion, in fact, in many states, it’s the law. Find an insurance agent that you are comfortable with and that you can trust. The agent should be able to guide you through what you really need, and not try to sell you insurance that you don’t need, simply to make a commission.

A general rule of thumb? If it’s really cheap insurance, you may not need it. Insurance companies charge premiums based on the level of risk of paying out on it. Is your business in a flood plain? Expect to pay a lot for coverage, but know that you are covered if and when you need it. On the other hand, if your business is transcription services, you might not need to carry a large policy for product liability.

Pay Yourself a Set Salary

This may seem elementary, but by paying yourself a set weekly or monthly salary, you are creating financial security both professionally and personally. Your salary needs to become part of the budget so that you know exactly what outgoing expenses will be. It might be tempting during profitable times to take just a little more. Think about the less profitable times…will you be able to support your family on less of an income?

Additionally, by establishing a set salary for yourself, you can save a lot of headaches should something unfortunate happen. If you choose to insure yourself for workers’ compensation or business interruption, it is much easier to verify your income and be able to receive appropriate compensation. It will also be much less complicated to apply for personal loans for automobiles, homes, or anything else you may want to purchase.

Pay Your Savings Account a Salary

If you’re just starting out with a new business, strive to save 10% of your profits each month. This may be difficult to think about at first. Consider, however, that a vast majority of new businesses fail within the first 1-2 years. If you save up front, you greatly increase your chances of surviving those first crucial years.

As your business grows, so will your “rainy day” fund. By starting early and budgeting for your savings, you will be able to weather the worst of the storms. Once you hit the six month savings goal, don’t stop. Hopefully your business will continue to grow in profitability, and something happens, you will need more money to continue in the same pattern. Keep saving, but also consider the help of a professional financial advisor to help determine when it is safe and most profitable to pay off existing business debt.

You can never prepare for every unknown. But as a smart small business owner, you can set yourself up to handle the majority of unexpected expenses that might put less prepared entrepreneurs under. A little up front planning can help your business continue to expand, and ultimately increase your overall financial success.

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