No matter how thoroughly you plan and structure your business, there are some things you simply can’t predict – namely, financial emergencies. They can come in all shapes and sizes, from a major equipment breakdown to an unexpected lawsuit.
The best way to protect yourself from these costly surprises is to have an emergency fund that can cover your business’s short-term cash needs. In the same way that you generate 1099 forms to cover your business tax-wise, you should create an emergency fund to safeguard against unexpected expenses.
An emergency fund is like life insurance for your business; you hope you never have to use it, but it’s there in case you do. If you don’t have one currently, don’t fret – we’ll share tips on how to start an emergency fund now. Let’s dive right in!
Why You Need An Emergency Fund
Did you know that a lack of available capital is a top concern for 20% of small businesses? If you want to count yourself out of this statistic, you need to start building an emergency fund.
Here are just a few of the many reasons you should have an emergency fund:
1. To protect your business from unexpected expenses.
Emergencies can crop up at any time, and if you’re not prepared for them, they can quickly put your business in jeopardy. An emergency fund can help you cover unexpected costs, such as repairs or medical bills, so you don’t have to dip into your long-term savings or take out a loan.
2. To provide a cushion for tough times.
Even the most successful businesses go through downtimes. If you have an emergency fund, you’ll have a cushion to fall back on when sales are slow, or you experience other financial setbacks. This can help you avoid going into debt or having to shut down your business.
3. To give you peace of mind.
When you know that you have a safety net in place, you’ll feel more confident in making decisions that could benefit your business in the long run. An emergency fund can help you take risks and experiment with new ideas, knowing that you have a backup finance plan if they don’t work out.
4. To help you avoid interest payments.
If you need to take out a loan to cover an emergency, you’ll likely have to pay interest on that loan. By contrast, if you have an emergency fund, you can avoid interest payments altogether – which means more money for your business.
5. To attract investors.
A strong emergency fund is one of the key factors that investors look for when deciding whether to invest in a small business. An emergency fund shows that you’re responsible and that your business is stable, even in difficult times.
With these reasons in mind, it’s easy to see why starting an emergency fund should be a top priority for any small business. Let’s delve into some tips on how to do just that.
Tip 1: Keep around 10-30% of your revenue in savings
Ideally, experts recommend keeping around 10-30% of your business’s revenue in a savings account to cover short-term expenses. This may seem like a lot, but it’s important to remember that emergencies can and do happen.
If you’re not currently generating 30% in revenue, don’t worry – you can start building your emergency fund gradually. Just make sure to set aside a bit of money each month until you reach your target amount.
Tip 2: Cut costs where you can
While you’re building your emergency fund, it’s important to be mindful of your expenses. Try to cut costs wherever you can in order to free up more money for savings.
There are a number of ways to do this, including:
- Negotiating lower rates with your suppliers. Don’t skimp out on quality, but see if you can get a discount for paying your suppliers early or in bulk.
- Canceling unused subscriptions and memberships. Do an audit of your expenses and cancel any subscriptions or memberships that you’re not using.
- Reducing your staff’s hours. If you don’t need your staff to work full-time, consider reducing their hours. Even one less paystub per week can help you save on payroll costs.
- Cutting back on non-essential expenses. Take a close look at your spending and see where you can make cuts without significantly impacting your quality of life. For example, do you need to pay someone to create W-2 forms, or can you use an online generator?
- Tracking your expenses. One of the best ways to identify unnecessary spending is to track your expenses for a month. This will give you a good idea of where you can cut back.
By following these tips, you can free up more money for your emergency fund – and that’s money you’ll be glad you have if and when an emergency arises.
Tip 3: Learn to predict slow periods
If you’ve been in business for a while, you’ll be able to predict slow periods by looking back on your sales data. This knowledge can help you plan for and prepare for potential emergencies during those times.
For example, if you know that your business usually experiences a lull in sales every January, you can start saving up money to cover your expenses during that time. This will help ensure that you don’t have to take out a loan or dip into your emergency fund if sales are slow.
Tip 4: Re-evaluate each month
Your emergency fund shouldn’t be inflexible; in fact, it’s important to re-evaluate all financial aspects of your business on a monthly basis. This includes your emergency fund.
If you experience an unexpected expense, you may need to dip into your emergency fund. In that case, it’s important to re-evaluate your budget and make sure that you’re still on track to reach your target savings amount.
Alternatively, if you experience a lot of growth in a particular month, you may be able to put more money into your emergency fund. It’s important to stay flexible so you can adapt as needed.
Business is an unpredictable beast and is one that can often throw financial emergencies your way. That’s why it’s important to start an emergency fund for your business – so you’re prepared for anything.
By following the tips in this article, you can set yourself up for success and make sure that your business is protected from the unexpected. Good luck!