No matter how tight cash is, the key to minimizing risk in a business is to have enough assets to finance contingencies. You never know what might happen during its operations, and the liabilities can easily pile up if you’re not prepared. Although it would be best to keep in mind that even though a lot can go wrong, prioritizing contingencies is how to start preparing for them.
You can start setting the order of what you want to save up for by figuring out the most likely unforeseen event that can happen. It’s not necessary to be clairvoyant but you can do an analysis of how your business has been operating so far. Point out the areas which cause unexpected expenses, and calculate how much you might have to shell out the next time those problems arise. Here are some aspects that you can consider:
Sudden Increase in Purchase Orders
Studies show how fragile the supply chain is, especially due to the effects of unforeseen effects. It is important to make a note of seasonal increases in demand, as well as any other reasons that can cause the desire for your product or service to rise. Try to predict which news headlines you need to look out for so that you will be able to anticipate their impact on your business.
For example, there was a shortage of rental cars in Alaska in May 2021. This issue turned out to be a consequence of the sensitivity of the supply chain; as COVID-19’s impact rippled all the way through the automobile industry; with demands for microchips not being met, and, in turn, the tourism industry failing to anticipate the number of visitors who want to rent their own cars.
Considering the impact of a surge in the purchase orders you need to meet is crucial in order to maintain your business’s service to its consumers. Look into the chinks in your chain and make sure that you have a supplier you can talk to, or someone to give you a line of credit when the time comes.
There are instances where urgent maintenance has to take place in order for business operations to continue. Placing employees and maybe even customers in an unsafe environment is a situation that is begging for a lawsuit.
For example, you are a restaurateur and in the middle of winter, your heater goes off. You’ll need to hire professional emergency boiler breakdown repair when this happens. You need to have an idea of how you’ll be able to handle situations like these without hurting your business’ finances. It would be wise to start looking into boiler covers that you can invest in early on, to reduce your urgent maintenance costs. That way, you’ll be able to stay open and have happy, warm customers enjoying your delicious meals.
Accidents During Operation
Unpredictable circumstances like someone slipping on a newly mopped floor, or possibly worse, that occur in your establishment will have you liable for any charges that the unfortunate person wants to file. It’s a matter of planning out how you’re going to mitigate any lawsuits your business might face. No one wants a PR nightmare, let alone one tied to the name of your business.
Consider preparing contracts that can solve issues through arbitration, or find yourself somewhere on the spectrum on the alternative dispute resolution and figure out how you can protect the business. It’s better to be safe than sorry, and you would most probably prefer reading through contracts instead of shutting down a cash cow.
Increase In Operating Costs
You’ll never know when the cost of your utilities will rise. The consumption or price of electricity and water can be billed variably, so plan accordingly. When the budget is being prepared, provide an allowance for the consumption of utilities. If your establishment spends less than what was intended, you just saved some money that you can put aside in case the worst happens. On the other hand, if the bills become too high, your business’ finances won’t be hurt too much because your allowance made a reasonable estimate as to the needs of the venture.
Preparing for contingencies such as these will allow businesses to remain resilient no matter how unpredictable the world is. Contingency funds provide entrepreneurs with a plan on how to attack problems as efficiently and as economically as possible. They are among the most important things to consider in a cash flow forecast.