Types of small business financial emergencies and how to prepare
No matter how resilient an SME might be, unexpected financial emergencies can occur. Not only will the business need to cope with the stress of the situation, but they will also need to keep things running as smoothly as possible.
Create a solid financial plan, and everything will keep ticking over. It’s common business sense, but where to start?
Evaluate the situation
Effective leadership is critical in a crisis, so try not to panic. Instead, take a step back and take the time to evaluate the situation calmly and carefully. The ability to keep your emotions in check and make the right decisions is crucial when wanting to minimise a financial emergency.
Before a business starts to address the issue, it’s crucial to know what initially caused the financial emergency. Drilling right down to the root of the problem allows companies to be better prepared to deal with a crisis in the future. Otherwise, businesses are left exposed to the same circumstances happening again.
Prioritise business expenses
Next, a company must start prioritising the bills that need to be paid. In some cases you may be able to extend payment times until a financial emergency has passed. Let your creditors know as soon as possible, to prepare them for your slow repayment.
Staff expenses can be another large pot of money to fill in a financial emergency, however using Soldo completely eradicates this risk. Soldo is a business cash card for your employees, meaning that ‘end of the month expense reimbursement’ is a thing of the past. Read more about how Soldo can improve your expense management systems here.
Plan for future financial emergencies
It’s never too late, or early, to plan for future financial emergencies. Saving now can minimise the impact of unforeseen expenses.
Use regular cash flow statements as part of planning so that there is a snapshot as to where the business may be at any given time. Being prepared for future financial storms allows firms to be in a better position to make the most of investment opportunities that can mitigate problems in the future.
Place funds in an accessible high-interest account
A careful balance must be struck between getting the best possible return from emergency savings and locking important money away for too long.
Research carefully and look for an account that balances high-interest rates with easy access. Make sure that you seek professional advice before you commit to any business account.
Create an emergency fund
The first line of defence in a crisis is always an emergency fund. Companies should take into account the type of business they’re in and the risks that they run. Companies with a high public liability will need a more aggressive savings programme. This is to counter the potential cost of legal action, but any business is wise to add a contingency plan to its emergency fund.
In setting up an emergency fund, consider the following:
- Save as much as possible during the high-profit times, particularly if operating as a seasonal business
- Make use of the ease and convenience of direct debits
- Work with a financial adviser on the best way to structure a fund
- Generate extra cash by creating additional business income
- Remain motivated to save by celebrating milestones
Insurance can be a useful safety net when a financial emergency hits. One in five small businesses faces a significant disruption at least once a year. The right insurance product can protect against loss or damage and provide money for necessary repairs.
A good business insurance package can help to protect businesses against trading losses that may have a much more significant impact than the initial event.