5 Simple Steps To Creating An Emergency Fund For Your Business
Setting up an emergency fund is simply good money management. Most people understand the importance of having a personal emergency fund, but what about your business? If you’re an entrepreneur or a small business owner, you’ll need some emergency support for your company as well.
Maximizing your cash flow is always a priority when you’re running a business. Make sure you have access to some cash that you can put away as well. The fund you build up may save your business one day.
Here are some easy steps for setting up and maintaining an emergency fund for your business.
1. Calculate How Much You Need
Every business will have its own needs when it comes to the savings needed to create an emergency fund. Think about some potential situations in which you would need this money, and then you’ll get an idea of how much you should contribute to feel safe.
Maybe you’ll need to cover general business operations when you decide to close your doors or cease operations.
Perhaps you’ll endure a period of time where you’re unable to offer your goods and services to the market.
Or, you might be a seasonal business that has extremely slow months where very little cash is coming in.
Whatever your business structure and needs, most experts agree that saving at least three to six months worth of operating expenses in an emergency fund is a good start.
2. Open A New Account For Your Emergency Fund
You don’t want to commingle your emergency funds with other money that your business uses. It’s also important that you don’t hold these emergency funds in a high-risk account. You’ll need access to those funds without warning, so you need them to be liquid.
Find the right balance between access and separation. You don’t want to dip into this fund easily, but you do want to be able to reach your money when it’s absolutely needed. Open a separate savings account or a money market account. You can also consider Certificates of Deposit. This will keep the money separate from your operating funds and any other business and personal accounts.
3. Decide How To Fund Your Emergency Reserves
Keep things simple by scheduling automatic deposits into your emergency fund. Remember, it’s okay to start small. Very few businesses can afford to fully fund a reserve account within days of setting it up.
Some businesses fund their emergency accounts by automatically putting a percentage of every sale into that emergency fund. If you send out one invoice every month to all of your clients, put a percentage of that income into the emergency fund. When the deposits are automatically scheduled, you don’t necessarily feel like you’re missing that income. And, you can easily set some savings goals.
4. Don’t Be Afraid To Ask For Help
You’re busy running your business, so setting aside this emergency fund may not be easy to manage. When your day-to-day operations are taking up every spare moment, look for ways to simplify how you save. Download a budget app to keep all the information and resources you need at your fingertips.
Leverage relationships and professional resources as well. If you’re not already working with a financial advisor or an accountant, consider talking to someone who can help you plan and manage your business finances.
5. Create a Backup Plan
Even a robust emergency fund can quickly be drained when your business hits a roadblock or an unexpected economic circumstance shows up. Make sure you have other resources at your disposal. This might be an SBA loan, which can be made in amounts between $500 and $5.5 million. You can set up lines of credit for when your business needs extra cash, or recruit investors when you’re struggling to stay afloat.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author.
He’s been featured on The Consults Corner on TAE Radio, The Writing Biz, What’s Your Story, and more.
He loves to share his personal finance tips and money management wisdom with others on his website, ShawnManaher.com, to help them find financial freedom