A recent US Bank study found that 82% of business failures are due to poor cash management and a misunderstanding of its importance. If you have a business, you need an emergency fund.
What is an emergency fund for businesses?
An emergency fund is money set aside for the unexpected. You set up an emergency fund to help you get through unforeseen and critical situations in your personal life. Your business needs it too. It is not a luxury; it is an absolute necessity.
Your emergency business fund is also known as retained earnings. Retained earnings are the money your business has left after all of its operating expenses, including wages and taxes, have been paid.
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You need to have cash (retained earnings) to keep operating and pay your employees (and yourself) in an emergency.
Planning an emergency fund
Every business experiences both trivial and important events that can impact operations and profitability. A business emergency fund will help mitigate and prevent both small financial hiccups and major financial disasters.
When deal with an emergency fund, planning is of the utmost importance. Businesses implode because of a lack of planning. Start planning and saving now so you have the right financing to cover these common situations.
An emergency fund for your business is, well, for emergencies. He’s here to help your small business survive a financial crisis. These sudden events can happen to your business just like in your personal life. When you have a financial safety net for your business, your business will continue to provide service regardless of the situation. Most of the time, being able to keep your business running during a storm can be the difference between a failed business and a success story.
Cash flow issues
Cash flow is a big reason many businesses fail. This is a fundamental reason for you to work on having an emergency fund. For example, if you run your business on a billing model and bills aren’t paid on time, your business emergency fund will help pay your employees and other creditors.
Your employees are a critical part of the success of your business, so it’s in your best interest to make sure they don’t end up without a paycheck due to cash flow issues.
An effective way to grow a business is to be able to seize opportunities when they arise. Of course, most of the time, the opportunity comes with risk. Having an emergency fund provides you with the capital to profit opportunities while protecting your business. A business emergency fund will ensure that your financial well-being is not compromised by taking advantage of opportunities.
How much should you save?
Typically, the amount you need to have in your personal emergency fund should be three months to a year of spending. You should apply the same rule to your business. Make sure you have between 3 and 12 months of operating costs. There are some factors that will affect how much you need, such as your industry / type of business, the reliability of your revenue streams, and your operating costs.
Where should you put your money?
After deciding how much to save, you’ll need a place to keep the money. The stock market is not a great place to hold these funds due to the associated risks and access issues. The idea is that the money is liquid and easily accessible.
There are several options for short-term investments, including money market funds, savings accounts, and certificates of deposit (CDs). Find the best interest rate online or ask your bank to negotiate a better rate.
As you work to build your emergency business fund, remember that it is not a luxury; rather, it is an absolute necessity. Without enough cash to cover your operating costs and payroll, your business is doomed. Start small and work to build a safety net for your business. Your business can thank you for having a prosperous future, and your employees too!