Business as in all of life cannot be 100% predicted. We can however, use models, historical data, projections, norms, averages et al to get a good outlook forward.
Households and businesses alike attempt to control finances by using a realistic Budget. The Budget is forged by real data on the cost of things needed to survive. It can also contain amounts devoted to unknowns like repairs etc.
Few Budgets I've initially seen have an amount devoted to Contingencies. Contingencies are unseen, unpredicted events. Covid shutdowns were a good example. A Contingency line item on a Budget acknowledges that S--- happens and sets aside funds to weather whatever may come. Of course, if nothing happens, the budgeted amount can be left in place and continue to grow. This take the discipline of actually SPENDING the Contingency amount as any regular expense and considering gone but retrievable. Experience teaches that if the money is not considered spent it will get commandeered for all manner of goofy and unnecessary things. This is true of Savings of any kind. That rainy day fund must be isolated and considered spent and gone for all purposes except retrievals for emergencies or other designated purposes. It is a wise CFO who lies about how much cash is available. This not malicious but rather a clever ruse to convince others about thin coffers. This must be used judiciously.
A recent case in point happened in my personal life. I inherited two charming Himalayan cats. They are sisters and both13. Old cats can have problems and one of mine became suddenly lame. Tests showed severe arthritis that had finally overcome her ability to hide it. More tests showed her kidneys were shot. I wanted to give her a chance and spent over $2000 in a a few days. She has improved somewhat and my Contingency fund was there when needed. In a pinch, credit can work for contingencies too but remember it is a claim on the future.
I recommend starting with 2% of revenue/income devoted to a Budgeted Line Item for Contingencies. This can be higher. It does not replace savings or investment or expansion cash set asides. Consider it spent but retrievable. If nothing happens let it stay put and keep adding to it. You can always disperse some of it if the amount has grow too large.
One thing for sure, life and business as part of it can hit you with surprises. We carry Insurance Policies for some of them and a Budgeted Contingency Line Item is in the same arena. Plan and Budget. You will then be better prepared to survive surprises.
Best,
Donn Marier
DM-Your Own CFO