How to Create a Bankable Business Emergency Fund and Save Smartly For a Rainy Day (+ the Math Around It)
Let me share an interesting stat with you:
Did you know that almost 33 percent of small businesses in America had no rainy day fund or emergency corpus that could help them deal with financial setbacks and events such as the pandemic, which disrupted their normal operations?
A survey, conducted by the US Chamber of Commerce in collaboration with the MetLife insurance company, confirms it. To top it up, if you are a millennial your saving habits are far from amazing.
Like you, most small business owners do not have access to huge emergency funds for your business and lines of credit that could tide them through uncertain times, such as a natural disaster, a financial collapse, or a global pandemic.
But COVID-19 has been an eye opener for all of us and more than anything else, has taught us the importance of being prepared for financial contingencies.
If achieving final stability for your small business is a key goal for you in the coming year, we are here to help.
In this post we’ll take you through the ins and outs of creating a business emergency fund, one you can bank on a rainy day—why it is important and things you need to remember when creating one for your small business.
- Why should you create an emergency fund for your business?
- 6 Actionable Tips for Creating a Rainy Day Fund
- How to Calculate How Much Money You Need to Put Aside?
Why Should You Create an Emergency Fund for Your Business?
Before you dive into the nitty-gritty of setting up an emergency rainy day fund, it is important for you to understand exactly why you need one.
Emergencies and disasters come unannounced, often when you least expect them. Be it the Great Recession of 2008-09, the European sovereign debt crisis of the 2010s, or the current economic downturn caused by the pandemic; the proverbial ‘rainy days’ are hard to predict.
So, they need to be prepared in advance.
And while you may have been able to save your business from hitting rock-bottom due to fast funding options and financial relief packages—this may not be always available. A solid emergency fund, therefore, is the best way to keep your business from being blown away by a financial tornado in the future.
Small businesses have greater credit constraints than their larger, multinational counterparts. Hence, they are often hit hardest during economic downturns and are, in general, more sensitive to weakening consumer demand.
The pandemic-induced lockdowns have caused the most damage to small, appointment-based businesses. This is because they do not have large marketing budgets, due to which they rely largely on organic footfall and word-of-mouth.
As small businesses often lack major cash reserves or large capital assets to be used as collateral, they find it difficult to secure additional financing during trying economic times.
These businesses cannot issue new stock to the public in order to raise funds, the way large, listed companies are able to do. Being less politically connected than Fortune 500 companies, they also have a harder time securing access to government bailouts and loans.
Therefore, bankruptcies among small, appointment-based businesses occur at a higher rate, and they are less likely to survive a recession (or other types of disaster), without a solid rainy day fund.
6 Actionable Tips for Creating a Rainy Day Fund
Understanding the importance of a sizable emergency fund is not enough to build one. If you’re like most entrepreneurs and small business owners, keeping up with the day-to-day operational expenses of your business is your primary concern.
But even if your business is a relatively new one and you’re yet to start making significant profits, creating a rainy day fund is quite possible.
Here are six tips to help you start saving for an ample contingency reserve.
Avoid Needless Spending
When your business is growing and expanding rapidly, it’s easy to get caught up in the hype of the latest big idea. The urge to invest money in your growing business is both natural and beneficial, but you have to be careful when choosing the right opportunities for growth.
Does your office really need that new beauty gadget or the latest piece of technology? Will this hot deal on a new product line really be worth it, or is it better to focus on the quality of your existing products before adding new ones to your repertoire?
These are the questions you have to consider carefully to maximize the efficiency of your operations and minimize needless spending.
Creating a monthly business budget – and sticking to it – is the best way to start saving for your emergency fund, because seemingly small expenses can add up over time.
You can invest any extra income into the future of your enterprise so that you always have a cushion to fall back upon when unexpected expenses arise.
As a small business owner, you will need the help of other professionals to facilitate the growth and expansion of your company. Many small businesses outsource functions such as bookkeeping, website design, and creating marketing content because the owners usually do not have either the time or the skills to perform every task that a business requires.
We don’t deny it—bookkeeping, website maintenance, and marketing your business are all important, but we’d recommend that these follow a planned approach. Having a proper marketing budget planner for your small business, for example, will help you access your business needs and spends in as well as ensure that you have a firm check on the budgets.
On the other hand, if you’ve just started a new business that doesn’t yet generate significant revenue, then you might consider cutting back on some of the outsourcing to save money for the future. You can temporarily invest more time into your business to perform some of these functions yourself.
Alternatively, you can reduce the fees owed to contract workers and consultants by getting a more basic version of their services and doing some of the remaining work in-house. This will allow you to allocate the extra money to your rainy-day fund without compromising the quality and efficiency of your business operations.
Your business expenses are the costs you incur in the ordinary course of running the establishment. To minimize these day-to-day expenses, you should invite your entire staff to help grow the emergency or rainy day fund, by finding new ways to cut costs.
Your staff understand their own jobs, and the role they play in the business, better than anyone else. Hence, they will be better able to tell you how you can save money without compromising on productivity, quality, or operational efficiency.
As a leader, you need to convince them to make the creation of an emergency fund one of their top priorities. If they understand that every bit of saved money is going towards securing the future of the business (and of their livelihoods), your employees will be able to find creative ways of being more economical without affecting productivity or customer satisfaction.
Capitalize on Profitable Months
Everybody in need of a haircut, a beard trim or pedicure and it is safe to assume that your appointment-based businesses doesn’t witness seasonality and dry-spells, it is not true.
Changing work-schedules, travel and even pandemic can impact your business.
That’s why it is imminent that you should stash as much money as possible into your emergency fund during the busiest months when you are generating higher profits. This will help compensate for the off-season months when revenue is on the lean side.
However, you should definitely try and put some money into your emergency fund every single month, just to build the habit of fiscal prudence and thrift. While it may seem difficult in the short term, it will help put your business on a sustainable path to success.
One of the easiest ways of growing your emergency fund is by investing some of the money that you have saved. Instead of letting the money sit idly in a bank account, you can use it to make more money through wise investment options.
However, the entire point of having an emergency fund is that the money in it will be readily available for use during an emergency. Popular investment options like the stock market might pay off over time, but they are not ideal for a rainy day fund because you will not be able to access the investment in case of a stock market crash.
Therefore, as a small business owner, you might want to consider some safer, more stable investment options for the money in your rainy-day fund, even if the returns on these are a little lower.
Money market accounts, short term Certificates of Deposit (CDs), and treasury inflation-protected securities are some of the safest investment options that can be cashed out quickly.
Utilize Tax Refunds
If your business gets a tax refund, then you should put some of that money into your emergency fund, instead of using it all up for immediate, day-to-day, operational expenses.
Tax refunds are basically ‘found money’ that arrive unexpectedly, so you can use them for your rainy day fund without cutting back on any of your usual business expenses or other monetary obligations.
While tax refunds might feel like a windfall, they’re not all that uncommon. According to a report by the global small business lending company OnDeck Capital, almost 65 percent of small businesses in the US received a tax refund for the year 2018.
Therefore, it is quite likely that your business too will be eligible for such a rebate at some point, allowing you to use that money to pad your rainy day fund.
How to Calculate How Much Money You Need to Put Aside?
One of the first steps in the process of setting up a rainy day fund for your business is deciding how much money you would need to have in it. This will depend on a number of factors, including the size of your venture and the type of industry you’re in. Here are some factors to consider.
If you are a relatively new entrepreneur or business owner, a good rule of thumb would be to try and build a fund that would cover your operational expenses for 30 days, if your business suddenly stopped generating any revenue.
Once you have such an amount set aside, you can start building on that until you have a fund that is large enough to run your business for a whole year or more on emergency savings alone. This will protect you and your company from financial downturns, natural disasters, and other setbacks when normal business activities have to be suspended for a time.
The size of your business and the potential cost of growth and expansion will also affect the ideal size of your rainy day fund. The larger your business, the more money would be required to keep it going for a given period of time.
A rainy day fund will also allow you to take advantage of opportunities to grow your business. If your research informs you that now is a good time to launch a new product, or open in a new location this fund will ensure that you always have enough cash to seize the opportunity and move forward with your plans.
Another factor to consider is whether legal issues such as lawsuits, fines, license cancellations, etc. are especially common in your industry.
For instance, if you operate a financial consulting firm, marijuana dispensary, or medical clinic, you might require a bigger rainy day fund to cover potential legal expenses than someone who owns a graphic design agency or a barbershop.
Now that you know the importance of an emergency fund for small businesses, you should waste no time in setting one up for your own business. If you need some help with the calculations when setting up your fund, you’ll find many free calculators and formulas online to help you decide exactly how much you should save for business emergencies, based on the particular needs of your business and industry.
You can also use Genbook’s Pricing Insights Calculator to forecast your savings and revenue and plan your emergency funds more effectively.
Editor’s Note: This post is contributed by Adela Belin. She is a content marketer and blogger at Writers Per Hour and passionate about sharing stories with the hope to make a difference in people’s lives and contribute to their personal and professional growth. Find her on Twitter and LinkedIn.