You may be asking yourself, "A business emergency fund? What for?" Well, you've come to the right place to find out why your business needs an emergency fund and how to plan for this.
It's not only a good idea to save money in an emergency fund for personal things that might come up... car breakdown, job loss, natural disasters, illness, etc. but the same goes for your business.
A business emergency fund is a savings account that you create for the business and tuck away money regularly (and then don't use it).
Why do you need an emergency fund for your business?
Just a few short years ago, our world went through the unthinkable when Covid quickly became our reality. Small businesses that had this emergency fund accessible for an event like this, were prepared to shift their operations and adjust to a new way of business.
There are other things that are a little more common than a pandemic that we can't always prepare for like:
Property damage, unexpected leaks, air conditioner problems
Technology failure/accidents, spilt water over computer, equipment malfunction
Legal issues or data breaches
How do I save for an emergency fund?
First, open a savings account at your bank. The savings account will allow you to earn some interest every month. Remember, this isn't an account with a high amount of transactions coming in or out multiple times a month.
Second, determine how much you are going to save. But wait, how do you do this?! This will also depend on your business but if you are just starting off you can set a certain dollar amount to be transferred each month. Starting with a percentage of revenue (a range of 5-10%) is also a great start.
Lastly, start transferring money (at minimum) on a monthly basis. The frequency will depend on your business but since you are already receiving your financials from your bookkeeper/CPA each month, then this should be easy to complete when reviewing prior months financials.
The most important thing to remember is that no one can predict an emergency so any amount of savings will help cushion the financial stress (and emotional stress) an emergency can bring onto a business. However, following these simple steps can bring you some financial peace.
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