Does Your Business Have an Emergency Fund?

When cash flow is stable in your business, it’s easy to forget how quickly disaster can strike and threaten your financial stability. That’s why you should always have an emergency fund on hand.

Get started today with these simple steps.

1. Calculate Future Expenses

Business experts suggest putting aside enough to cover expenses for at least six months. This includes daily operating costs, employee salaries and benefits, utility bills, debt payments and inventory.

You should also put away a little extra to account for unexpected expenses or growth opportunities. If tough times for your business could spell trouble for your personal finances, it’s smart to budget for those expenditures in addition to everything else.

2. Create a Savings Plan

Once you know how much you need to save, figure out where the money is going to come from. This may require cutting costs within your business to free up funds or renegotiating the terms on existing accounts and loans.

Calculate a minimum savings “payment” as a baseline. Plan to save at least that much per month, and put more aside during lucrative periods. Setting up an automatic payment structure ensures that regular deposits are made.

3. Establish a Dedicated Account

Depositing money doesn’t guarantee that your emergency funds won’t be spent on something else. Create an account that’s separate from your business and personal accounts to reduce the temptation to dip into these savings.

Work with an accountant or bank manager to choose a structure that offers a decent return but doesn’t penalize you for making withdrawals when you actually need to, such as a money market account or short-term CD.

4. Get Approved for a Line of Credit

A business line of credit is a form of lending that gives you access to a set amount of money that can be drawn on whenever funds run low. Getting approved for one early on in the life of your business provides a buffer in an emergency.

It’s always wise to have access to the money immediately when you need it rather than having to wait to go through the process of getting a regular bank loan – or worse having to settle for a merchant cash advance.

5. Set Milestones

You won’t magically have six months of extra cash on hand when you first set up your emergency fund, and there may be times when it seems like savings aren’t adding up fast enough.

Motivate yourself to stick with your plan by setting smaller goals, such as saving up enough for one month or three months.

When you hit the six-month mark, saving should have become such an ingrained habit that you may want to consider continuing until you have enough for a full year.

It’s never too late to start putting away money in case of an emergency. You may not feel like you’re saving much at first, but if you stick with your plan, you’ll have more than enough to keep your business running in any circumstances.

If you’re ready to apply for a business line of credit contact us today!