Plan for Legal Emergencies in Your Cash Flow

Every small business faces challenges, such as sales slumps, employee turnover, and maintenance requirements. However, when it comes to their financial situation, not many small businesses plan for legal emergencies. 

This can hurt your cash flow and operational stability. You would rather not find yourself short on cash and forced to make difficult decisions.Make sure your small business prepares for potential legal issues. 

From establishing short-term credit to managing operations, you’ll need to be prepared. In this lucrative blog post, we’ll walk you through the steps of developing a strategy to help you navigate legal surprises with care. Continue reading to learn more.

Let’s begin!

Key Takeaways

• Exploring the impact of legal emergencies    
• Looking at the ways to create a financial buffer 
• Uncovering ways to build reserves for critical times 
• Understanding the need to change plans every year 

Understand the Impact of Legal Emergencies

While you can map most expected costs into your annual budget as a small business, that’s not always true for surprise legal costs. That’s because these costs tend to be unexpected, meaning they don’t naturally fall under a header in your business finances spreadsheets. These costs might require immediate action. And you could end up paying a large sum of money at once. 

Perhaps you have to post bail for an employee, which can cost thousands of dollars. Perhaps you’re dealing with court paperwork or need to hire legal counsel. To cover these costs, you may need to dip into your operating cash, which can limit what you have available to cover employee pay, rent, or utilities. If your business plan and financial strategies don’t account for legal surprises, it’s time to make a change so you don’t hurt your business’s operations. 

Interesting Facts
Nearly one in five small businesses lost over $5,000 to preventable legal issues in one year, and 47% lost at least $500.

Create a Financial Buffer

While you can’t predict a legal emergency, you can be prepared. Plan on setting up a financial buffer so your operational budget doesn’t take a hit. A legal contingency line, for instance, can be an excellent addition to your monthly budget. Ideally, you won’t need to use it most months. But you’ll be glad to have the extra funds when an emergency does happen. You may need to speak to someone about posting bail, for example, or hire an attorney. The contingency line item will be a good reminder that you need to be proactive about the possibility of sudden problems. 

Build Your Total Reserves

How much money should you set aside? Small businesses often operate with slim margins, especially in their early existence. But it’s smart to aim for at least one month of costs in your reserves. Even better, aim for three months of costs. That may sound like a lofty goal, but you can build up your reserves by gradually setting aside money. 

Consider that you could encounter one big legal emergency each year. You’ll want to have money ready to handle this problem. It may cost up to 10% of your operating expenses, for example. You do not want to deduct money from payroll and rent to cover it. Instead, be prepared to act quickly by having liquid funds on hand. 

Have Short-Term Credit Ready

Even the best saving practices aren’t always adequate to cover significant legal expenses. Plan on having short-term credit ready ahead of time. This could include a short-term loan agent or a credit card with a high limit. You may want a business line of credit, as well. In any case, make sure you have something ready with pre-approval. Try to avoid using these options unless it’s absolutely necessary. 

Create Written Rules for Approvals

Legal emergencies don’t often occur during normal business hours. If something happens on the weekend or late in the night, you want to be ready. You may need to intervene right away. But if there isn’t clarity as to who can take the lead on spending approvals, you’ll eat up time. 

Make sure you have a formal document outlining approval rules. For example, who gets to approve emergency spending? It’s a good idea to have a list of several names in case one of them can’t be reached. Establish spending limits before seeking additional approvals. Also, determine when it is best to contact legal counsel in an emergency. These decisions will most likely be made by senior management team members, but it’s always best to be clear to avoid wasting time. 

Refine Your Plan Each Year

Your business may learn something from one legal emergency that can be applied to another one. Or your financial picture may have changed. As a result of these factors, you’ll want to review and refine your legal plan each year. 

Look over your reserves and determine if they are adequate. You may discover that you need to allocate more money toward them. Check on your emergency lines of credit, and review your risk profile as an organization. And if you’ve had personnel shifts, make sure you’re still satisfied with your approval rules. 

Be Prepared

As a business, you don’t want to be caught off guard by a major legal emergency. Start planning now so you can avoid financial stress later. Establish financial reserves and line up short-term credit options. Create a financial buffer in your budget and establish the chain of command for approving spending during an emergency. You’ll be able to work through them efficiently and without jeopardizing your bottom line if you have a well-thought-out plan. 

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