Planning · June 30, 2020

Build a Business Emergency Plan With a Fund for Unforeseen Expenses

A robust business emergency plan can be integral to managing expenses and income during uncertain times. By building a business emergency fund, companies can bolster their ability to thrive in the short and long term.


Common business emergencies

Unforeseen challenges presented by natural disasters, political unrest, market shifts or unforeseen labor issues can disrupt or even halt operations. It's important to review operations to learn where disruptions can pose a major financial impact. Take care to identify areas that may not be an urgent threat now but could pose an issue if not handled promptly.

Supply chain and logistics management

Inventory and supplies can be a critical area of concern for manufactures and producers. For instance, a shift in consumer preferences combined with the impact of a cyclone in the Indian ocean caused the price of vanilla beans to spike almost as high as gold. Businesses of all sizes, from large candy manufacturers to neighborhood bakery shops, felt the impact.

Taxes and regulatory fees

Paying taxes and fees to regulators is an unavoidable cost of doing business. However, sometimes these expenses may be higher than anticipated. Setting aside funds now for potential increases can help mitigate future shocks.

Infrastructure

Infrastructure can often be overlooked as a potential emergency area. Utility repairs, plant maintenance and mandatory renovations can be expensive and arise at any time. Companies may be able to put off paying a vendor to dig up a sewer line or rewire a plant, but waiting too long will cause business disruptions and skyrocketing costs.

Labor

Business owners may foresee payroll as a major necessity. However, non-payroll human resource costs can easily grow beyond expectations. Consider future benefits growth and project what may happen if a large portion of the staff is suddenly unavailable to work or needs retraining.

Growth and opportunities

Rapid growth can be expensive in the short term and even pose long-term risks if financial preparations aren't in place. The additional costs in labor, training, supply, equipment and space required to ramp up production can put pressure on your cash flow.

Also, staying competitive can require having the means to take advantage of unexpected chances to optimize resources. Suppliers may offer discounts on larger purchases. New technology may emerge to help make operations more efficient. Essential talent may become available for hire. When profit margins are tight, it's even more crucial to be able to respond promptly to these opportunities.

Building a business emergency fund

As the old adage goes, plan for the best, but prepare for the worst—readiness hinges upon having sufficient capital available on hand. Companies usually begin the journey of building a fund for their business emergency plan by determining how much capital to set aside and how to generate this capital.

How much you set aside depends on the unique needs of your business. Consider maintaining a readily available portion of annualized revenue, ideally 10% to 30%, or at least 3 to 6 months of expenses.

Prioritizing expenses will help you make sure you have enough in your emergency fund to pay at least your highest-priority bills. Identify the most critical obligations and rank how a lack of coverage will impact operations and revenue. Typically, payroll and suppliers rank high, along with taxes and critical insurance policies.

It's a good practice to continually assess the goal amount as the operations and needs of the business change. Consider saving more during good times. Look for ways to cut costs if the money is amassing quickly enough.

Streamline your savings by automating the process. Once your goal amount is determined, set up automatic transfers into a separate account. Set a specific periodic transfer amount or direct a specified portion of each sales transaction towards the account.

In addition to using savings to build your business emergency fund, consider lining up other financial options for your business emergency plan. First, take advantage of profitable seasons to:

  • Maintain a healthy credit score
  • Cultivate strong working relationships with creditors and debtors
  • Review contracts to learn where both parties may have room to negotiate during emergencies
  • Re-evaluate policy needs in light of growth, personnel changes or other operational developments

Don't forget about your banking partnership. Work to explore short-term financing options and terms, such as establishing an ample line of credit. Understand how each component of your business emergency plan fits together to suit your needs and strategy to ensure long term survival and growth.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.