If the recent recession taught us anything, it’s that even the most successful businesses sometimes encounter challenges beyond their control. From natural disasters like earthquakes and floods to equipment breakdowns and even employee illnesses and injuries, small businesses can suffer financial emergencies of all shapes and sizes. Fortunately, there are steps small business owners can take to protect their businesses in the event of a disaster or just a rainy day.
Emergency funds, also known as “rainy day” funds, are cash supplies kept on hand so a business can keep operating in lean times or in the event of an emergency. Not only do these funds enable companies to keep providing services while paying their employees and suppliers, but they can also allow owners to continue supporting their families.
While it’s clear that maintaining a rainy day fund is smart business, you might have questions about the amount of cash you need to stow away, as well as different means for acquiring it. By doing your homework, you can assess just what it is a solid emergency fund should contain.
Components of an Emergency Fund
It’s no secret that accidents and disasters can strike without warning. While you can’t predict what situations might transpire, you can take steps to prepare yourself for the worst.
One of the first steps in creating an emergency fund is taking a close look at the particulars of your company, including its type and culture. While all businesses need to plan for the future, some industries face more significant risks in terms of lawsuits and legal actions. If you operate a medical practice or financial consulting firm, you probably need a larger rainy day fund than someone who runs a graphic design business.
Similarly, some businesses are responsible for complying with additional government regulations, which can increase operating budgets. Finally, businesses should look at their workforces and consider the costs of employee salaries, 401(k) plans, health benefits and bonuses. The last thing you want to worry about is your workers jumping ship during a crisis because you’re unable to follow through on your promises.
Along with business type, owners should consider their plans with regard to growth. If you plan to take advantage of expansion opportunities in the near future, you might want to set a bit more cash aside in your rainy day fund.
Finally, as you make preparations, it’s important to consider the effect a disaster could have on your family. Many small business owners have a great deal invested in their company, and a period of low profits could prove devastating. For best results, make sure you save enough for expenses like rent and healthcare in addition to business operations costs.
Creating an Emergency Fund for Your Business
It’s not enough to recognize that your business needs a rainy day fund. You must also take steps to reduce spending and boost the amount you’re putting in your virtual piggy bank each month. Here are two steps to ease your business into being able to contribute to a rainy day fund.
Before you can start saving money, you need to find ways of cutting expenses. Along with reducing extraneous spending, small business owners can review business costs, negotiate with suppliers and take advantage of unclaimed tax deductions. You might also be able to share marketing and advertising costs with other local businesses in your area.
Save in High-Profit Times
It’s not uncommon for small businesses to experience a great deal of profit variation in the course of a year. If you’re creating an emergency fund, strive to put aside more money all year round, but especially during the high-earning months. Doing this will make up for the periods when revenue is on the lean side.
It’s also a smart idea to use an automatic savings plan that deducts money from your checking account before your can use it for other costs, and to celebrate savings milestones as you reach them.
Choose the Right Funding Type
Businesses looking to create rainy day funds have multiple options at their disposal. Many small businesses make the mistake of putting all their savings exclusively in the stock market. While these investments can pay off over time, entrepreneurs might have trouble accessing funds in the event that the market plunges. As a result, businesses might not have the resources they need when disaster strikes.
For best results, small business owners should seek out safe savings and investment options that can be cashed out with little notice. Low-risk municipal bonds and short-term CDs (Certificates of Deposit) are generally regarded as good choices. Don’t forget to contact multiple banks in search of the best deal.
So what do you do if disaster has already struck? If you haven’t saved up a fund to deal with emergencies, you might want to consider contacting the U.S. Small Business Administration about taking out a disaster loan. With a little luck, this organization just might be able to help your business out of a jam.
Saving for emergencies is clearly crucial for keeping your business in the black. Start with a one-month savings net and keep increasing your goals. In no time at all, you will have a healthy nest egg to protect yourself.