The Importance of Building An Emergency Fund For Your Business : Under30CEO The Importance of Building An Emergency Fund For Your Business : Under30CEO
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The Importance of Building An Emergency Fund For Your Business

| May 25, 2013 | 2 Comments

Business Emergency FundYou more than likely have an emergency fund for your household, but do you have one for your small business? While you may have more business assets than personal assets, very little of those assets are liquid. Having a liquid emergency fund to rely on when catastrophic event occurs that you could have never predicted is imperative if you want to survive through the aftermath. Emergencies happen and even after an emergency happens, the bills must be paid. We often hear business owners say things like, “I never pay myself until all of my employees have been paid,” or, “I would rather not get paid than close the doors on my employees.” These are some very successful mantras of dedicated business owners, but before it comes to that, every business should be establishing a buffer for potentially difficult financial times. The future of every business is unknowable, whether you’re running Apple, or the corner hot dog stand.

We’ll go over both the how, and the why of building a business emergency fund.

Why Not Just Rely on Your Insurance?

Small business insurance packages will generally pay for loss of income when your company must close its doors due to a catastrophic event. Unfortunately, insurance does not pay for every type of claim, and specifically excludes events like earthquake and flood unless you purchase a special federal or state insurance policy. There are also those times where negative press can lead to reduced sales. In these situations, insurance cannot cover you and you have to rebuild your reputation while you use your own money to cover expenses.

Even when your insurance does approve a claim, you have to wait until the claim is processed and reviewed to even receive payment. This can mean you might run into a slow period where you will need to cover immediate expenses on your own, in hopes of being reimbursed by your insurer later down the line. Without an emergency fund, you may have to take out a cash advance Texas from lenders like Power Finance, among others just to cover rent or inventory.

Keep Separate Accounts

The most important thing you’ll need to remember is to keep your accounts separate. One of the biggest mistakes inexperienced business owners make is being unable to separate personal funds from business funds. Some businesses have the power to create enormous amounts of cash flow and if you’re tempted to tap into that cash flow too much, you can easily put your business in jeopardy. I worked for a couple of years at a start-up investment business whose owner ran into this problem. He found himself at the right place, at the right time, and created a business around financial investments. Rather than treating the millions of dollars of profit the company was generating as business funds, the dollar signs flashed above his head and he financed a multi-million dollar ranch in Wyoming as a personal expenditure. Months later, the market began to change and the owner made two company-wide pay cuts. Now, the company is just a memory of what it used to be. Low employee moral and dissatisfied clients have left the company barely hanging in the balance.

If you keep your accounts separate, it’s mush easier to distinguish between your own personal funds and business funds. Pay yourself a comfortable salary in your own private account, but only after your business expenses have been met. Create an emergency fund account separate from your business and personal accounts and pay into it as often as you think is necessary to cover financial setbacks. The amount might be different or each business. If you have high overhead and a lot of employees, you’ll need to set aside a substantial amount. If you have low overhead and few employees, you can get by on less.

How to Get the Funds You Need

Building a business emergency fund is the ideal way to pay for expenses that simply cannot be covered by your reduced cash flow in emergency times. Unfortunately, if you do not have this type of liquid fund set up, you may resort to using your credit cards or running up your debt. It is best to start the fund while your business is doing well so that deposits become a habit and withdrawals are few and far between.

  1. Estimate your risks and market fluctuations – Depending on the what industry you’re in, your risks can be large or small. A family restaurant may have fewer emergencies than say, a moving company. If most of your risks are insurable and you don’t have any foreseeable market changes, you may not need to put away as much money.
  2. Calculate your monthly expenses and determine your total savings amount – How much money does it take to keep your business running per month? This includes property costs, bills, payroll, and all other costs. Three to six months of savings is a general rule to go by so after you know how much money you’ll need, you’ll be ready to start depositing toward your fund.
  3. Determine how much you’ll be able to budget for each month – Gathering the funds you need may take months or it may take a couple of years. Determine how much money you’ll be able to contribute per month. Then, divide the total goal amount by the monthly deposit to determine how soon you’ll be able to reach your goal.
  4. Create a no-touch savings account – Create an account to start contributing monthly deposits in. This should be a liquid account, so steer clear of CDs and term deposit accounts that don’t allow you to access funds penalty-free.
  5. Deposit each month until you meet your goal.

It’s as simple as that. The added peace of mind you and your employees will have knowing that your jobs will still be there no matter what comes your way is an incredible feeling.

Angela Prickette is a recent college graduate. She works for herself as a freelance writer and photographer. Her favorite activities include, skiing, rock climbing, and personal fitness.

Image Credit: Shutterstock.com

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  • http://www.it-sales-leads.com/ Barbara Mckinney

    Agree!! Even though what ever sizes of business it is as long as it is a business, it is advisable to get in touch of building emergency funds for security upon catastrophic matters. Don’t mixed it with other accounts so that you will monitored the in and out of finances. Make it a habit:)