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How to Make a Business Emergency Fund on a Budget
If a business emergency fund isn’t at the top of your to-do list, your next business downturn could be your last.
Owning and running a business come with risks. Most of those risks are easy to overcome: an employee calls out sick, equipment breaks down, a shipment doesn’t make it on time. You’ve handled these with ease and grace. Business is, however, a fickle thing, and too many companies aren’t prepared for droughts in customer traffic. That’s just one reason to keep a business emergency fund in your figurative back pocket.
Your business emergency fund is a lifeline when road construction cuts your foot traffic by 70% or when two of your biggest clients sign a six-month contract with another catering vendor. The point is, no matter how much you plan, there are no guarantees in business. That doesn’t mean you have to face the next financial emergency unprepared.
Building Your Small Business Emergency Fund
An emergency, by nature, is an unexpected event that requires immediate attention and has the potential to be disastrous. A business emergency could take a variety of forms, some of which are more serious than others. The more prepared your business is, the higher your chance of moving through an emergency with limited consequences. So where do you begin?
In one form or another, many business emergencies are financial, or at the very least, require some capital to work through. Your first step, then, is to determine your monthly expenses so you have a starting point to work with. Most expenses, like rent, utilities, and wages don’t vary a whole lot, so this should be relatively straightforward. Once you have your goal, it’s time to figure out where the money is coming from.
1. Cut expenses
This is a tricky topic because there are a lot of ways to cut expenses that will hurt your business. Payroll is one of the most significant expenses in any business, but if you overwork your employees or don’t pay them fairly, they’re not going to stick around. Treat your employees well, and they will treat your customers and clients well.
There are, however, other ways to cut expenses. Are you turning the heat down when you’re closed? Are you wasting paper by printing receipts that you may not need? Are you ordering “cool” products without researching them? Can you open doors and windows on beautiful days and keep the AC off? Maybe you’re outsourcing work you could do on your own.
2. Increase revenue
Easy enough, right? It just might be. How is your customer service? What about your online reviews? Is your business a comfortable one for customers and clients? Do you have a social media presence or a physical presence in your community? Taking steps to ensure you have a welcoming, friendly business may not magically increase your numbers by next week, but it will do a lot for your long-term success.
3. Find cash
Again, this isn’t as far-fetched as it may sound. You may have more cash than you realize that could go into your business emergency fund. Did you get a tax refund? A discount from a vendor? Switch to a less expensive phone service? Don’t let that money disappear. Send it directly to your emergency fund.
How Much Do You Need in Your Business Emergency Fund
The general recommendation is to keep three to six months of expenses in your business emergency fund, but for a small business with a thin profit margin, that might seem overwhelming. Make that your ultimate goal, but start with more concrete steps or benchmarks. Fill your emergency fund with one month of expenses, then two, and so on. Once you hit the six-month mark, see if you can build your savings to a full year’s worth of expenses.
You also need to make sure your growing account doesn’t get lost in your general business expenses. An easy way to keep your business emergency fund separate is to, literally, keep it separate. Open a savings account or put your money into a certificate of deposit (CD) or share certificate (similar to a CD, but issued by a credit union). The interest rate for a CD or share certificate is typically higher than you’ll get with a savings account. The other big difference is that with a savings account, you can withdraw cash anytime you need it. CDs and share certificates have term lengths anywhere from three months to five years.
Most experts agree that a low-interest savings account is better for an emergency fund than buying stocks or other investments because, even with the potential for a higher return, there is also the potential for a loss.
What Is a Business Emergency?
You found ways to build your business emergency fund, and you have a dedicated account for that fund. Now the challenge is determining what constitutes an emergency. Some emergencies are apparent: you need cash to meet payroll obligations or lease payments. Others are clearly NOT emergencies: new inventory software is on the market or you want to put a new awning on your storefront.
Ultimately, you need to decide what is or is not an emergency for your business, and don't touch your emergency fund unless you truly need to.
An easy way to protect your business is to talk to Heitmann Insurance Services about business insurance. Our business insurance packages are designed to meet your needs and let you focus on what you do best.