According to a recent survey, half of all business owners couldn’t cover a two month revenue loss without dipping into their personal savings. If you don’t have an emergency fund for your business, you may be putting your company and personal finances in a precarious position. Here’s why your company needs a rainy day fund just as much as you do.
Why Your Company Needs a Rainy Day Fund
The sad truth is that your operations could be disrupted at any time due to a pandemic or hurricane. You never know when a disaster is going to strike and force you to shut your doors temporarily, leading to weeks or months of lost revenue.
If you don’t have a business emergency fund, you may not be able to cover your expenses while your business is closed. You may be forced to take out business loans or dig into your own pockets to pay your vendors and employees. And if the business disruption lasts long enough, you may have no choice but to close your doors permanently. That’s why you need enough cash reserves to cover your company’s expenses for at least a few months.
Even if you have a stellar marketing plan in place, you may experience a dip in revenue at some point. Recessions can have an impact on consumer spending and cause everyone to cut back on discretionary purchases. You never know when sales are going to decline and leave you without the funds you need to pay your bills. So it’s wise to start setting aside some of your company’s profits to build a rainy day fund.
Equipment can break down at any time, even if it’s relatively new. My partner recently spilled tea on my three year old laptop, which fried it beyond repair. I didn’t think I’d need to replace my laptop anytime soon and had to dip into my personal savings to buy a new computer.
I don’t have a business emergency fund, but this experience made it clear that I need one. Any entrepreneur who relies on equipment to do their job should have funds set aside in case their gear breaks. That way you won’t miss important deadlines or have to scramble to get a loan when your equipment fails. You’ll just be able to run to the store and grab whatever you need to keep your business going.
Another reason why you need a business emergency fund is to avoid debt. Taking on too much debt is bad for your company. If you have too many loans, you may have trouble making the payments, especially during slow seasons. Companies with lots of debt can also have trouble securing the financing they need to grow and expand.
One of the best ways to avoid debt is to have an emergency fund. If you experience an unexpected dip in revenue, you’ll be able to cover your expenses with your savings instead of borrowing money.
How to Build a Business Emergency Fund
Now that you know why your business needs an emergency fund, here are some tips on how to build one.
The first step is to get out your bank statements and calculate your monthly operational costs. Financial experts recommend keeping at least three months’ worth of expenses liquid in a savings or money market account. If your business is seasonal or carries a lot of inventory, you may need more cash reserves to get through slow periods.
Then all that’s left to do is start saving. You could set aside 10% to 15% your revenue every month until you reach your goal. But if you can’t afford to put that much away, just start saving whatever you can. It’s better to have some money set aside in case of emergencies than none.
Do you have an emergency fund for your business? Why or why not? Let me know in the comments section below!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.