Written for EO by Jessica Thiefels, social media coach and organic marketing consultant.
You probably know that only 20 percent of all businesses survive past their first year. (And that only half survive more than five years, according to Business Insider.) But did you know that the top reason why those businesses fail is capital? 82 percent experience cash flow problems.
One of the largest challenges with managing cash flow is unexpected expenses. “A big issue is under-capitalization at the outset of starting a business. Business owners frequently underestimate how much money will be needed to fund operations,” Keith Speights, of Motley Fool tells USA Today.
Whether you’re in year one or year five, unexpected expenses can pop up and eat away at profits, or worse, put your business in debt. Plan for the following unexpected costs in your 2019 budget to stay ahead of the curve.
Freelancers or Contractors
More than 70 percent of small businesses have hired a freelancer in the past, and 81 percent plan to in the future, according to LinkedIn. Even if you aren’t sure how freelancers would fit into your business model, if you set aside the budget for temporary skilled workers, you’ll have the resource available when the time comes.
For example, you never know when an unexpected project requires more work than you can take on, and a freelancer or contract worker will be needed. This person can provide the perfect bridge to scaling your business or taking on new work prior to hiring full-time staff, but if you don’t plan for this expense, you could put your cash flow in jeopardy.
To avoid this unexpected expense, look to your high-level plans for 2019 and then consider where specialist freelancers may be needed and estimate the cost. Use resources like this UpWork report for graphic design freelancers or this UpWork report for freelance project managers.
Health insurance could make the difference in attracting and retaining talent, even for businesses with one to two employees. According to a recent survey, 46 percent of job seekers say that health insurance is a deciding factor in their job search and 56 percent of employees cite employer-sponsored health insurance as a key factor for staying at their job.
Providing health insurance might seem like an insurmountable expense, but you also know how vital your staff is to overall operations, especially when there’s only a handful of them. HealthMarkets recommends that you seek out individual plan options, which can be as low as $82/month per person (with subsidies) instead of a group plan which is cumbersome to manage and can cost employers as much as $450/month per person.
As you look to your 2019 expenses, consider whether this is something you’ll be taking on. If so, it may be wise to start your research now, getting a better picture of what you can expect to spend.
Maintenance or Repairs
Whether you have an office space that needs upkeep, company vehicles that require repair, or even a single laptop; you never know when an integral tool for your business might falter and require a tune-up.
Tally these potential costs up and add them as a line item in your 2019 budget. For example, Brandon Turner, entrepreneur and real estate investor breaks for his potential maintenance costs as follows:
“When estimating expenses for a rental property, I like to average these out on a per-month basis. For example, I might spend $500 this month, $100 next, nothing for the following 10 months (which is fairly typical). This means I spent $600 for the entire year. Divide that by 12, and you get $50 per month. If the property brings in $1,000 per month, that would be a 5% repair budget (because $50/$1,000 = 5%).”
Consider how you can use similar reasoning to reach an estimated cost that you can add into the budget.
A Shift in State or Federal Taxes
If you’re reading this in the US. then you know we’ve seen significant changes in tax law that affect American business owners of every size in recent years, which is why Julia Change, of Northwest Mutual, suggests: “Overall, as you’re thinking about ways to adjust your tax strategy, remember that there will always be an element of the unknown, such as what a future Congress may decide.”
This is why it’s important to stay in touch with a financial expert or CPA. They’ll know the latest regulation changes and even those that are to come, allowing you to determine expected costs along with the ones you’re not anticipating.
Plan for Unpredicted Business Costs in 2019
Murphy’s law says that if something can go wrong, it will. As a business owner or manager, budgeting for unforeseen circumstances is a must. While this might seem like a general expense, an emergency fund is actually your entire operating budget for a certain amount of time. This will protect you if you need to cease operations in the face of catastrophic events that halt all incoming business, like health issues or a natural disaster.
What’s the right amount to set aside? Treat it as you would a personal emergency fund. Most financial experts agree that you should have at least three to six months of expenses saved.
Use this time to forecast your yearly budget and operating expenses, making room for these unanticipated expenses. In the end, whatever wasn’t spent can go back into the business. In either case, you’ll be less likely to experience cash flow issues and your business can thrive for years to come.