Traditionally, emergency funds are for personal use, to protect you and your family if something happens. So, why don’t you have one for your business? A small business emergency fund can help your business get through tough times. It may even save your business completely in an emergency.
A business emergency fund is an amount of money put aside for emergencies. Ideally, this fund should completely cover 3-6 months of business operating costs. Now, this is hard to build but could protect your business in the long run. After all, in the event of an emergency, you will have the money to pay the bills and staff.
As much as you try to prepare for the future, there will likely be unexpected events that happen. Be it a natural disaster, a pandemic, or even a fire at your business location. All of these are random events, and unpredictable. But, preparing an emergency fund offers the following benefits.
Having a small business emergency fund available gives your business financial security. This fund could prove to be turning for your business in an emergency. It can allow you to pay your staff, repair your building or replace stolen goods. Whatever the emergency, these extra funds will be beneficial for you.
After an emergency, life continues, which means you still have to uphold your obligations. An emergency fund allows you to maintain subscriptions, bill payments, rent payments, and supplier costs without delay. This helps your business keep good credit and relationships in any situation.
The most difficult part of creating and building an emergency fund is deciding where those funds will come from. This is made more difficult as a small business or sole proprietor as margins are slimmer than in larger businesses. You may need to cut expenses to find the extra funds. Below are some steps for building a small business emergency.
To work out how much your emergency fund needs to have in it, you need to know your monthly operating costs or working capital needs. This figure needs to include all costs for your business to keep it running if you could not operate as normal. Once you have that number, you can start saving. Aim for one month, then two, and so on.
Ensure that you set up a separate business bank account for your emergency fund. After all, you want to ensure this money is separate from everyday savings and general business funds. The initial account can be a savings or checking account, but as your fund grows consider moving some of it to a money market or high-interest account. Just ensure that you always have enough funds in the initial account to cover you in an emergency.
Set up scheduled payments to start depositing funds. The sooner you start and the more consistent you are, the faster your emergency fund builds. Even $50 each month will start to add up. You can also add extra funds in whenever you wish, just ensure you are consistently adding money. Look at where you can cut expenses in your business to help boost the fund faster.
There are various emergencies that can occur, from illnesses and pandemics to natural disasters and accidents. Decide which emergencies are relevant for dipping into the fund. For example, if a key employee is severally ill, the emergency fund could be used to hire a temporary replacement and pay sick leave. However, this scenario may only be relevant if the employee is off work for several weeks, not just days. Creating a business emergency plan for the use of the fund is key for future success.
Having a small business emergency fund to fall back on can stop your business from shutting down due to unforeseen circumstances. It is even more important for those who rely on their business as a sole income stream. Use the tips above to start building your emergency fund and set your business up for anything.