As an entrepreneur, much of your role depends on flexibility and the ability to pivot when circumstances change. This is certainly true when it comes to unforeseen expenses. By learning how to handle the unexpected, you can set yourself (and your business) up for success.

5 Ways to Handle Unexpected Expenses

Every business will face unforeseen expenses from time to time. Sometimes they’re small and easy to handle, while other times they can put you in a compromising situation. (If you aren’t ready, that is.)

To reduce the damage that unexpected expenses can cause to the health of your business, we recommend all entrepreneurs do the following:

1. Establish an Emergency Fund

The first step is to establish an emergency fund that will help insulate you from outside risk. You’ll have to decide how large you want your emergency fund to be, but it’s pretty smart to have a minimum of three months’ worth of expenses covered in this fund. As your business grows, you may feel more comfortable having one year’s worth of expenses in this account. That essentially gives you 12 months of runway in a situation where you have zero income.

Most businesses can’t build an emergency fund overnight, but you should be able to do it over the course of six months to a year. (Be ruthless in slashing unnecessary expenses during this time.)

2. Develop a Conservative Budget

The smartest way to prepare for unexpected expenses is to develop a conservative budget that leaves margin for the unknown.

Say, for example, that your business has a monthly operating budget of $20,000. Rather than allocating 100 percent of this money to expense categories, you may choose to set aside 10 percent of the budget ($2,000) for “unforeseen expenses.”

Whenever expenses crop up, you have the money to cash flow it each month without tapping into your emergency fund. And if you don’t need the money, you can toss what’s leftover at the end of the month into your emergency fund.

Having this built-in buffer will allow you to handle 90 percent of unexpected expenses. The other 10 percent can be handled using the emergency fund and/or other methods discussed in this article.

3. Set Up Lines of Credit

Even with a cushion in your budget and an emergency fund, there are significant expenses that can’t always be paid for in cash. This is where a business line of credit or quick cash loan can come into play.

Online lending partners are readily available online. It’s worth reaching out to some of these lenders and seeing what products they have available. By already knowing who you would go to in a situation like this, you empower yourself to act quickly in an emergency.

4. Forge Powerful Partnerships

Emergencies happen. Unforeseen circumstances have a way of popping up. There’s nothing you can do to predict what will happen in three months, six months, or a year from now. (If the COVID-19 pandemic has shown us anything, it’s that we have far less control than we think we do). And if you operate out of this mindset, you’ll find that it transforms the way you interact with your business partners.

Rather than thinking about what your business partners and suppliers can give you, think about how you can add value to them. Give more than you take. Go out of your way to offer assistance when it’s needed. Forge connections with individual decision makers on their teams. Then, when challenging circumstances arise, you’ll find that your partners are more willing to lend a hand, help out, or extend credit.

5. Diversify Your Revenue Streams

If you’re highly dependent on a single revenue stream to sustain your business, all it takes is one change in circumstances and everything can go haywire. Insulate yourself from this sort of risk by diversifying your revenue streams and spreading out your risk. You’ll sleep a whole lot better at night!

Do You Have a Game Plan?

Unexpected expenses are never fun but having a game plan can help you weather these temporary storms and continue operating at peak levels. Try implementing each of the techniques outlined above, as well as adding any industry-specific strategies you believe give you a chance to bolster your downside protection.