It’s not exactly a secret that most small business owners cite balancing expenses and cash flow as one of their biggest challenges when running a business. In fact, according to a recent study, a fifth of business owners are kept awake at night by money worries. This applies even when there is no economic crisis or financial struggles! That’s why creating an emergency fund for small businesses is a necessity for those times when cashflow is stretched.
Working for an employer means that you get paid for sick days or holidays, but when working for yourself you have to factor in the extra cash for those times business is slow or you are ill. As we all know, if you can’t work, you can’t make money! And, no one wants their business to lose money or fail.
Why should you create an emergency fund for your small business?
Therefore, you should have a business emergency fund in place as a contingency strategy to stay afloat when you feel any financial strains. However, even with the best planning and effort on your part, having an emergency fund isn’t easy. That’s why I put together this guide to help you achieve a healthy solution for when your cashflow gets low. While you never really know when you need it, you’ll be grateful that you have one!
1. Know How Much You’ll Need
First off, you will need to know how much is adequate for your business’ emergency fund. For example, how much would you need to keep your business running? In order to work this out, you should go through your business bookkeeping and create a cash flow forecast. If Covid has taught us anything, it’s how to cope in a worst-case scenario! Therefore, gather your paperwork, set a goal and then aim to achieve it. The average length of time any professional should prepare for is 3 months so calculate your monthly income and expenses, and use this as a starting point.
2. Incorporate an emergency fund into your business plan
Running your own small business means wearing so many different hats for each essential role it takes to make your business a success. One very important element is to have a business plan and that should include your plans for an emergency fund. It should also outline what your financial goals are, and have specific targets relating to a back up plan. Similarly, integrate an emergency fund into your business budgeting plans.
3. Decide on the right bank account
If you haven’t already opened up a separate bank account, you’d be wise to do so in order for your emergency funds not to get used for day to day business expenses. Decide on whether it’s suitable for you to open a savings account which will give you a higher interest, or an instant access account when your money is more easily accessible. In addition, it’s also a good idea to set up automatic transfers so you don’t have to remember to deposit cash each month.
4. Monitor times when your income is high
Take note when your business is making money during the good times. On these occasions, you can put more money into your account and that will balance funds for the slower months. Although the easiest way to save is to set a percentage of your monthly net income, there will be times, such as seasonality, which can have a bigger impact on your revenue. Take advantage of these dates and protect yourself further by squirreling away more when you can.
5. Take advantage of windfalls
We all love a surprise windfall of cash! And this has the potential to come through via a tax refund, for example. If you think you’re entitled to a tax rebate, then putting aside all or even some of that into your emergency bank account will give it a big boost! Similarly, look at what self-employed expenses you can claim back for. Claiming expenses back on your home office, travel or for tax allowances. Alternatively, research available small business grants and loans, and if you’re successful with an application, make sure you put a chunk of it aside for into your business emergency fund.
6. Regularly review your expenses
Are there areas of your business budgeting where you can re-evaluate your expenses? Lowering what you spend, no matter how little, can help free up some extra cash to put away. This may sound like an obvious way to save some of your hard-earned cash, but keeping a close eye on your business spending will help save money. For example, are you spending too much on ineffective marketing, or can you get a better deal with one of your suppliers? Keep a close eye on where you’re spending money, and find out ways to reduce them.
7. Get proactive with budgeting tools
Crunching numbers is something that not many people enjoy doing, yet it’s a necessity when running a business. If you don’t already do this, one way of ensuring you keep on top of your business finances is to start using budgeting tools. Do you prefer spreadsheets or cloud software? Find a system you can work with which records all your business information, and stick to it! You should also assess it regularly in order to achieve better money management for your business.
8. Be diligent and adjust
We’re all aware of being tempted to dip into funds for non-emergency reasons, but resist! Be consistent with monthly payments and strive to always be diligent when it comes to checking business bookkeeping. If circumstances change for any reason, be open to adjust your goals accordingly, and expect the unexpected. Then, if your business does get into trouble, you are better prepared. Plus, when you’re ahead of your finances, you could even see ways of boosting your business income.
Whether you manage to save a few thousand or a few hundred, having an emergency fund for your business can really save you on a rainy day. Emergencies, or unexpected life events do happen so feel secure by having a safety net to ensure you’re covered if an crisis arises.
