Every business should have an emergency fund. If the pandemic taught us nothing else, having funds to fall back on, for individuals as well as businesses, is a necessity.
Significant financial fluctuations can be caused by any number of things that are out of your control, such as
- Changes in the economy, regulations, and taxes
- Natural disasters like floods, fires, tornadoes and hurricanes
- Social unrest like protests and riots
- Illness, injury or death of critical staff
Having an emergency fund to fall back on could mean the difference between halting business temporarily and completely closing your business, usually in bankruptcy.
Now, to be clear, we’re not talking about an account where you set aside funds for your quarterly estimated tax payments. You definitely should already be setting aside funds for that every month (roughly 30% of your monthly gross revenue).
How do I start an emergency fund?
- Start With a Goal
If business ceased to operate for a month, how much would you need to keep it, and you, running? Work on building at least a 3-6 month cushion. The 6 month time frame is best if your business is your sole source of income for your family. This should be your starting point (but certainly not your ending point).
- Open a New Account
Open a new business bank account where you currently conduct your business banking, as this will make transferring the funds to your emergency account much simpler.
- Start Transferring
Make it a policy to transfer a set amount at every month from your regular business account to your new emergency fund account. This can be a set dollar amount every month or a percentage of gross revenue for that month. You can even arrange to have your bank automatically transfer a certain dollar amount to your emergency account every month so you don’t even have to think about it.
- Know the Financial Health of Your Business
Run your Financial Reports each month to understand your income and expenses and to realize when and how your natural financial fluctuations occur so you can map out a successful savings plan for your emergency fund.
During some emergencies, like the COVID Pandemic, you can also consider alternate resources. The Small Business Administration typically offers loans and relief packages made available through government fun