So, you’re looking for some helpful information on how to build a business emergency fund. You’ve heard about the need to keep an emergency fund within the company during times of disaster, and
There are several different reasons that an emergency fund can be crucial.
- You may be a small business owner who has a good, steady cash flow, but things can change drastically during a period of financial hardship.
- Maybe your sales have been good for a while, but during a tough month, they dip. If you’re not prepared to dip into your emergency fund, what can you do to ensure that your company keeps its cash intact, even during times of change?
Need of having an emergency fund
The answer is simple. By having an emergency fund, you can rely on your revenue to pick up the slack when seasonal trends reverse, or you can depend on a steady income from customers to pay your bills during rough periods.
The key is to know exactly how much money your company can pull out of its bank account. Most small businesses are limited on their cash balances because of the most complex and complicated accounting procedures.
As a result, there isn’t a lot of room for your emergency fund to go down.
Amount of contribution
Knowing how much you can contribute to an emergency fund each month is important. Ideally, you’ll have enough to cover at least one month’s expenses.
If you have two months’ worth of sales, then you’ve got a baseline. But, realistically, a three-month period should provide enough funds to sustain your business through at least three months without relying on sales revenue.
If you don’t know how much your emergency fund can contribute, you can get a quick estimate using a loan calculator or other investment tool. It will give you a good idea of how much you need to either keep its balance flat or increase it with sales revenue.
How to build a business emergency fund doesn’t have to be difficult.
Simply knowing what is available and how you will use it can go a long way toward keeping your business afloat during lean times.
- You want to have a separate fund for operational expenses such as rent, supplies, and advertising.
- Then, you want to include some liquid assets in your emergency fund and money tied up in long-term investments such as a stock portfolio.
When you budget for expenses, you’ll also want to take stock of your assets.
- To determine how much money you’ll have available for short-term profit and loss, plan on adding up the costs of your daily operating expenses over a few months.
- For example, if your business buys office supplies for ten cents apiece, then you’ll need to figure out how many units you’ll have to purchase throughout the month.
- Divide this number by the number of days in a month to come up with an average cost per day.
- Your profit for that month will be the difference between what you pay for supplies and what you make in profit.
If you’re looking for information on how to build an emergency fund, there are several places where you can turn.
Check with your accountant, your finance department or talk to friends who own small businesses. There’s no limit to the number of resources you can draw from this type of funding source.
- You don’t have to use this fund for immediate expenses only as you can use your emergency fund to help you pay down debt, for example.
- You may also be eligible to reduce the interest rate on your credit cards or get a discount on your auto insurance. If you don’t currently have any credit lines, you may still qualify to open a credit card account. Talk with the customer service desk at the store to find out how to apply.
Best ways to build a business emergency fund
One of the best ways to build a business emergency fund is to borrow money from family and friends. If you don’t have any, ask your landlord if they would be willing to lend you some money.
- You could also try your local bank or credit union, but these institutions usually don’t offer loans to small businesses. It might take some time before they’ll approve your loan request, but at least you’ll be able to stay up on your debt payments.
- As an entrepreneur, I am always looking for great ways to build an emergency fund to help my business. Like most business owners, I have many employees.
- Each employee is an individual, and each one of them could use some added cash. There are two ways that I have found to be effective.
One is to make an employee a general partner in the business.
In this manner, the money paid out to the employees is partially invested by the company in the company’s funds.
It may sound like a lot of work to do, but it’s not. All you need to do is determine the amount of money you can invest and take a look at your books.
- Then, figure out what percentage of your overall profit can be invested. You can also do the same thing with any expense item in your business. It is how to build a business emergency fund quickly. It just requires some ingenuity and a bit of hard work.
Of course, if you want to know how to build a business emergency fund, you don’t have to go this far by yourself.
It would be best if you looked into getting some professional advice from someone who knows more about managing an emergency fund than you do.
- They can give you some good pointers on where to start and how to do it and help you get your project off to a great start.
- Some other options you have when you’re looking how to build a business emergency fund include putting your money into a mutual fund or stock broker’s account.
With these options, you have the convenience of putting money into a new account anytime you choose, but you have no say in where the money goes once you’ve put it there. If things go south, there’s not much you can do.
There’s nothing you can do to save yourself from the consequences. So this isn’t an option for most of us to look forward to.
- To build a business emergency fund is to take a class. It doesn’t matter your particular goals; taking a course will show you how to set up the fund correctly.
- You’ll be able to get advice from people who have been there and done that, which can be very helpful. Even if you aren’t sure how to handle a particular situation, knowing what to do can make all the difference.
As you learn how to build a business emergency fund, it’s important to remember the goal you have in mind.
Do you want the lump sum to keep the lights on at night? Are you hoping to pay off some high-interest debt?
Maybe you need the money to expand and improve the way your business is run. Whatever it is, make sure the goals you have are well defined and that you can see them clear enough in your mind to achieve them.
- Once you know what you’re trying to accomplish, you can start putting together the details. Most of the time, you will build your fund with whatever assets you have available to you.
- If you can’t easily access cash from your current savings or retirement accounts, borrowing against those accounts might be the only option.
- As you build your business emergency fund, don’t be afraid to take out loans if you need them. Just be careful about what type of loans you take out and don’t borrow more than you need.
When you’ve got all the details worked out, it’s time to start building your emergency fund.
Start with one thousand dollars in funds and work your way up as you need to. When you think you have reached your goals and are feeling financially secure, tap that fund again. Don’t worry about waiting. Emergency funds should only be used when there is a real risk of losing your business.