How Your Small Business Can Prepare for Financial Emergencies

Small business owners have to keep up with an ever-evolving economic landscape, and they’re often tested by financial emergencies and uncertainties. Some things are simply beyond your control, whether it’s a sudden market downturn or an unforeseeable global event.

Being able to weather financial emergencies is a crucial survival skill. It also begs an important question: Will you be prepared if disaster strikes? If not, you could be putting your operations (and your employees’ jobs) at risk. Here are 10 strategies to help fortify your business against financial emergencies.

1. Protect your business with insurance

Running a small business comes with built-in risk. Think of business insurance as an important line of defense. The right coverage can help you avoid potential lawsuits and protect against financial losses. You might consider the following types of policies:

2. Have cash reserves on hand

Just as you have an emergency fund for your personal finances, it’s also wise to build a financial safety net for your business. According to SCORE, a nonprofit that’s affiliated with the U.S. Small Business Administration (SBA), the rule of thumb is to keep 10% of your monthly revenue in an emergency fund — plus at least three to six months’ worth of operational costs. Having these cash reserves in the bank can help your business manage surprise financial setbacks.

3. Maintain strong business credit

Having healthy business credit is a crucial part of securing financing, including emergency loans. Below are some factors that play a role in your business’s credit score:

• Your company’s annual revenue and outstanding debts
• The estimated value of your business assets
• Credit history length
• Your company’s overall industry risk

You can improve your business credit score by using a business credit card responsibly, paying your bills on time, setting up trade lines with suppliers and working with lenders that report your account activity to business credit bureaus.

4. Assess your business’s weak points

Being aware of your business’s vulnerabilities can help you get ahead of them. Consider performing a SWOT analysis. Here’s what that looks like, according to the Economic Development Collaborative:

• Strengths: Where and how does your company excel? What gives you a leg up over the competition?
• Weaknesses: Where could you improve? How are competitors outshining you?
• Opportunities: Are there market segments you could break into or areas of your business you could grow?
• Threats: What are your biggest obstacles (including industry or economic threats)?

5. Stay connected to your market

Be sure to stay on top of industry changes, news or trends that could affect your business. That includes industry forecasts and important developments within your market. Industry shake-ups could throw an unexpected wrench in your operations.

Keep your ear to the ground by attending industry events, taking advantage of networking opportunities and staying in the know when it comes to your market. It could help you respond more quickly to relevant news and changes.

6. Diversify your revenue

If the bulk of your business revenue is coming in from one source, what will happen if there’s an unexpected disruption? Diversifying your income streams can help mitigate financial losses — if one area of your business declines, other revenue generators can help pick up some of the slack. Start by running an income assessment and clarifying your business’s main sources of revenue. Then ask yourself where you might be able to expand. That might mean:

• Exploring new markets
• Adding new products or services
• Modifying your marketing strategy

7. Keep your business expenses in check

Wasteful spending could be draining your business’s finances. Consider trimming or eliminating unnecessary costs — doing so could free up money for your business emergency fund. Having a leaner budget can also keep your operating costs low. Periodically review your expenses, which may include:

• Office or retail space (rent, utilities, internet, etc.)
• Inventory and supplies
• Equipment
• Employee wages, including contractors or freelancers you work with
• Marketing and advertising costs

Can you make any tweaks to your outflow? For example, maybe you can shop around with different service providers or relocate your office space.

8. Restructure your debt

If your business is carrying debt, refinancing your balances could save you money and make it easier to build your emergency fund. The idea is to consolidate high-interest accounts. You might do that with a debt consolidation loan, which allows you to merge your open balances into one new account with a lower interest rate. A business balance transfer credit card might also be worth considering.

9. Invest in your team

Recruiting and onboarding new employees can add up fast. The average cost per hire is almost $4,700, according to the Society for Human Resource Management. Investing in your team is a simple way to cut down on costs and create a positive business culture. Take time to listen to their needs, address their concerns, offer competitive benefits and make them feel appreciated. Employees who are invested in your company and believe in its mission may be more likely to go the extra mile.

10. Have contingency plans in place

One thing the COVID-19 pandemic taught us is to expect the unexpected. How would your business cope with another global crisis? Emergencies can also be caused by natural disasters, cybersecurity breaches or other events that make it difficult to operate. According to the SBA, your response plan is a key part of your recovery, and it should be built around your business’s specific needs. This emergency business resource from the U.S. Department of Homeland Security might be a good starting point.

Financial emergencies come in all shapes and sizes. What matters most is being prepared. As a small business owner, a financial hiccup could majorly disrupt your operations. Your best defense is to evaluate your risk, put up some guardrails and be proactive.