Unexpected expenses arise in every business. The difference between those who struggle to deal with them and those that don’t lie in their planning for profits and cash reserves. Those who struggle with the unexpected never have any cash reserves to tap. Those that don’t stress over unexpected costs not only have cash reserves, they never let them go unchallenged. Any unexpected expense that was unnecessary is stopped before it gets out of hand. This attention to what is being spent each month earns higher profits that build cash reserves.
Unexpected expenses are any expense you didn’t see coming. An example would be a vital piece of new equipment needing to be repaired. Unexpected expenses are never a challenge for those who have cash reserves. Those who don’t have cash reserves for large unexpected expenses are constantly juggling figuring out how to pay for a considerable expense they weren’t expecting.
While significant unexpected expenses can cause you to dip into your cash reserves, put them on payment terms, or use a credit card to cover the additional cost, the more significant issue with unexpected expenses is the cumulative cost of the little ones that go unnoticed. A business that fails to plan for profits is exposed to this second issue.
Any direct, indirect, or nonoperating costs that go unchecked are likely to undermine your profits as more and more unplanned expenses slip into your different expense categories. A monthly profit plan lays out what you expect to sell each month, how much you expect to spend by major expense category, and what you expect to make in Gross Profit, Operating, and Net Income. These monthly targets are used to establish the gap between what you planned to spend and earn against what you spent and earned.
Large variances between planned and actual P&L results are typically driven by unexpected costs and, in many cases, unnecessary expenses that never should have been incurred. The use of a monthly actual-to-plan scoreboard and variance reporting helps you quickly see areas of your business that are out of control and need to be reined in.
The issue isn’t that unexpected expenses happen. The issue is they go unchecked. If an unexpected expense is necessary, adjust your profit plan and deal with it accordingly. Where businesses lose the most money lies in allowing these unexpected expenses to continue robbing you of profits while making it more challenging than it needs to be to build and maintain your cash reserves so you can deal with the large unexpected expenses that can grind your operations to a halt.