How to prepare your small business for unexpected setbacks
Running a small business means dealing with a variety of unforeseen circumstances. While you can’t predict what will happen, you can take proactive steps to prepare yourself. Follow these 5 key strategies to help you prepare for the unexpected and ensure your business isn’t severely impacted.
1. Create a Contingency Plan
Like safety drills or emergencies, developing a contingency plan is a smart way to prepare for the unexpected. Your plan should cover a range of potential problems, including natural disasters, economic recessions, supply chain interruptions, and the unexpected loss of key personnel.
Begin by identifying potential risks that your business may face, then outline specific actions you'll take to mitigate these risks and keep your business operational.
Smart tip: Assign responsibilities to key team members and create a communication plan to keep your employees, customers, and stakeholders informed during times of crisis.
2. Build an Emergency Fund
An effective way to prepare your small business for unpredictable events is to build and maintain a financial cushion. Create an emergency fund specifically for unexpected expenses or economic downturns. Having cash reserves can make a world of difference when you encounter unexpected challenges, such as a sudden drop in revenue or unforeseen maintenance costs.
Smart tip: Set aside a portion of your profits each month into a separate account. Aim to accumulate at least three to six months' worth of operating expenses in this fund. Having this financial safety net can help you weather storms without having to resort to taking on added debt.
3. Review Key Metrics to Identify Red Flags
Sales revenue is typically the best indicator of how well your business is performing, but other indicators can function as a red flag to make you aware of challenges ahead:
- Average Sale. Keep track of competitors with lower prices and enticing discounts that might be luring your customers away.
- Acquisition. A decrease in orders, calls, or foot traffic could signal a growing disconnect with your audience.
- Gross Profit. Rising costs or a shift towards lower-margin products may be impacting your profitability.
- Web Traffic and Leads. A decline in these metrics could mean your customers are looking at or ordering from competitors.
- Conversion. Fewer leads turning into customers might require a closer look at your sales funnel.
- Employee Satisfaction. Keep an eye on staff turnover and increased sick leave, as they often reflect deeper issues.
Smart tip: Set thresholds that act as early warning signals and monitor those numbers, when you notice issues take steps immediately to course correct.
4. Review Your Insurance Coverage
Insurance is a vital component of risk management for small businesses. It’s a safety net to help protect your assets and finances when unexpected events occur. Depending on your business type and location, consider various insurance options such as:
- Business interruption insurance. This coverage helps replace lost income and covers necessary expenses when your business operations are disrupted due to unforeseen events like natural disasters or property damage.
- Liability insurance. Protects your business from legal claims and financial losses resulting from accidents, injuries, or negligence.
- Cybersecurity insurance: In a digital world, this type of insurance helps safeguard your business from cyber threats, including data breaches and ransomware attacks.
Smart tip: While extra insurance may require an upfront investment, it can save you from significant financial setbacks. It is a prudent idea to discuss with your insurance provider or accountant.
5. Build a Strong Company Culture
Your employees play a significant role in helping your business navigate challenging times. Building a strong business culture that emphasizes teamwork and resilience can be a valuable resource when facing unexpected setbacks.
Smart tip: Don’t think of employee training as a cost, but as an investment. Encourage open communication and have development plans. When your team feels valued and informed, they are more likely to contribute their ideas and solutions during challenging times.
Preparing for the unexpected requires a multifaceted approach. By reviewing and implementing these 5 strategies, you can build resilience, adapt to changing circumstances, and guide your small business toward long-term success.