Unforeseen expenses are expenses that occur suddenly and without warning. Your business should be prepared for unexpected expenses.
Unforeseen expenses are difficult to predict, but you should still take them into consideration when you set up your budgets.
Examples of unforeseen expenses include machinery breaking down, the cost of raw materials soaring, having to replace your work laptop, or dealing with unexpected office repairs, such as damage to the plumbing or electricity.
How to plan for unforeseen expenses
A budget is a plan that shows how much money you expect your business to earn and spend in a given period, for example a month or a year.
When you run your own business you should have budgets that you can use to steer your company in the right direction and make sound business decisions. A budget will also help you figure out how much you need to earn to run a profitable business.
When you budget, you shouldn’t just include your known expenses—your fixed costs and variable costs—but also consider how much of a buffer you need in case of unforeseen expenses.
How much you need will depend on how much you know you’re spending each month, as well as how big of an unforeseen expense you could run into: Do you have an office space where problems could occur? Or perhaps you have a landlord who would be responsible for these costs? Similarly, if you don’t have a large inventory, there’s no need to worry about water leaks or fire damage, and if you don’t have expensive machinery, you won’t need to plan for the day they break down.
What to do when the unexpected happens
Unforeseen expenses will occur throughout the year, but here are some tips for how to handle them:
- Sell off your current assets so that you can cover the costs
- Negotiate with suppliers to lower costs, freeze payments for a period, or extend payment deadlines
- Negotiate with your bank to reduce your interest rate, or to pause loan repayments for the time being
- Increase your prices so that you’ll have more money coming into your business—however make sure that you don’t increase the prices so much that you lose customers or can’t compete with other businesses
- Consider operating with a (JIT) inventory system, where you only produce goods when orders come in. That lets you cut down on your inventory costs, raw material costs and warehouse rental costs.
- Cut down on costs for example by switching to free invoice software