Any small business owner knows that running a company requires a significant amount of investment. But for many successful businesses, those initial startup costs are well worth it. There remains a pertinent question, though: how much of your profit can go into your pocket, how much should you reinvest in your business, and how much shouldyou save?
Emergency Funds of Businesses
We’ve talked about personal emergency funds before on our Two Cents Blog. Whether you keep it in a dedicated account or have a set portion of your savings reserved for a rainy day, it’s a wise practice. For every individual and family, the exact number will be different. But if you have the equivalent of, say, 18 months’ worth of your earnings set aside in a savings account, you can feel good knowing you have a safety net in case of a financial fall.
The same notion applies to businesses. We’ve also written about business banking mistakes. In that article, we discussed the pitfalls of not having a financial plan, and a key part of such a plan is having a reserve you can tap into during hard times. You certainly don’t want to seek a business loan every time your cash flow weakens to a dribble, and an emergency fund keeps your business healthy.
Setting Up an Emergency Business Fund
Here are some steps you can follow to help establish a rainy-day fund for your business:
1. Calculate How Much You Need
The operating costs of a business can vary significantly. A landscaping company with a team of six employees and lots of tools and machinery will have much higher expenses than a one-person dog-walking business.
To figure out what you need, determine how much it costs to keep your business running each month. Add up your recurring expenses, such as payroll, rent, insurance, and subscription services. Then calculate and add your business’s variable costs, such as utilities and inventory, which is your monthly total. Then decide how many months you might be able to withstand with little-to-no income. For many businesses, three to six months is a healthy target.
2. Open a Dedicated Account
It’s best to keep your emergency money separate from your everyday business account. This helps you avoid spending your rainy-day funds on non-emergencies. An account with low fees and high interest will help you grow your emergency savings, as long as you don’t have to dip into it.
3. Automate Your Deposits
To build your account, consider making consistent payments. Automated monthly transfers from your principal business account to your new emergency account help you build your fund on a reliable schedule.
4. Decide What Constitutes an "Emergency"
What counts as an emergency? A burst pipe that closes your shop for a week? That sounds like an emergency. But weak sales for two months straight? Is that an emergency?
It’s up to you and other decision-makers in your organization to decide what constitutes an emergency. Clearly define acceptable reasons for withdrawing from the fund and don’t use these reserves for routine expenses or non-essential purchases.
Maintaining Business Health
Business finance can be complex, even for small businesses. Contact a Vectra Bank professional today to discuss your business banking options.
