In today’s crazy environment, the importance of building an emergency fund for your household has been brought to the forefront. But, Is It Important to Build A Business Emergency Fund? You bet! The U.S. Bureau of Labor Statistics reports that approximately one-third of businesses fail in the first two years, while half fold within five years. Why? Mainly because of cash flow issues. With many businesses struggling more than ever right now, it’s critical to have access to liquid emergency funds to survive.
Can’t I just Rely on Insurance?
You may be wondering why you wouldn’t just rely on insurance you have to pay for a loss of income if your company must close. For starters, insurance doesn’t pay for every type of claim. Therefore, you’d be looking at funding your own fixes with money that may or may not come from an insurance policy.
Insurance claims may also take a long time to be processed, reviewed, and paid out. Can you cover your immediate expenses while you wait to be reimbursed? Without an emergency fund, you may struggle to cover rent or produce the inventory you need for your business.
Changes in regulations in your industry or tax changes may result in financial fluctuations you weren’t anticipating. None of which would be covered by insurance.
Keep Separate Accounts
Separate accounts also make it much easier to keep your books up to date EVERY month. By regularly preparing and analyzing your different business financial statements, it ensures you have a clear picture of where you are at all times. It’s important to keep a handle on your cash flow! Unfortunately, at this time too many of us know what documents are required by the banks and the US Government in order to get a loan to cover business expenses when an emergency arises.
When deciding what type of account to keep your emergency fund in you’ll want to make sure it is a liquid account, so steer clear of CD’s or long-term accounts you can’t touch. Pay into it as often as you think necessary to cover any financial setbacks you have. Every business would have a different amount, depending on their overhead and employee situation.
So, what are the best steps to start saving?
- Estimate risks – Depending on what industry you are in; risks can be big or small. If you feel that most of your risks are insurable and you don’t have employees to increase those risks, you may not need to put away as much money as other businesses would have to. Ultimately, consider how long it would take your business to bounce back from a sudden loss of income.
- Calculate your monthly expenses and determine total savings needed – How much money will you need to keep your business running every month? Don’t forget property costs, bills, payroll and anything else you pay every month. Three to six months of savings is a general rule to go by.
- Figure out how much you can budget for your emergency fund EVERY moth – Starting your fund is the first priority. In order to get an idea for when your emergency fund will be completed, figure out how much money you can contribute every month. Then, divide your goal by this amount, and you’ll be able to see how soon you’ll be able to reach your goal. And don’t stop contributing!
Where Will I Fund This From?
Remember to start off small. Lower expenses where possible and be more frugal. You may also consider staying away from more risky deals until your goal is met. Other ideas include:
- Move office locations to somewhere cheaper
- Save tax refunds
- Cut back on business trips
- Cut back on unnecessary outsourcing
- Analyze all purchases and avoid anything unnecessary
When Can I Spend This Money?
Ideally, you won’t! But there may be instances when spending the money on items other than an emergency may be appropriate.
Perhaps you are ready to launch a new product line but in order to expand your business and be strategic, you need cash. Your emergency fund allows you the freedom to capitalize on opportunities like buying out a competitor, purchasing extra inventory at rock bottom prices, or anything else that would give you the ability to move with speed.
So, Is It Important to Build A Business Emergency Fund? For sure. But in the end, make sure to continually reevaluate monthly expenses to ensure your emergency fund will cover your needs. Only you know what is best for your business and by following these suggestions, your business will be as strong as ever!