Here’s a reality check: When businesses fail, probably 80 percent crash because of poor cash flow. Establishing an emergency rainy-day fund is not an option.
Don’t get soaked. An emergency rainy-day fund is imperative.
Yes, all businesses need healthy retained earnings. That’s cash in the event of emergencies, such as slow-paying customers or when the nation’s economy slows down.
Time is money and an emergency fund gives you time. During unexpected challenges or lean times, time is of the essence. Given enough time, businesses can meet payroll, pay expenses and otherwise stay operational.
Agility is important for business. And liquidity supports agility.
An emergency fund also enables businesses to capitalize on important opportunities for growth – whether expanding into a new market, buying out an adversary, or acquiring needed extra inventory at bargain prices.
A small print shop, for example, doesn’t need an emergency fund as large as a doctor’s office which can face medical malpractice lawsuits.
Depending on your type of business and situation, you should save anywhere from three months to one year’s worth of anticipated expenses. In some cases, maybe even more savings are needed.
So set your goal realistically and automatically set the money aside as a budget line item until you attain your objective.
Here are ways to save for an emergency fund:
Include emergency funds in your business plan – Your business plan should indicate your organizational structure, operational benchmarks and objective for an emergency fund.
Keep the emergency fund separate – Don’t put the money in your normal business account so you don’t risk spending it.
Make it an interest-bearing account – Put the money an interest-bearing account, such as a money market funds or savings account that can be easily withdrawn if needed. (This is also a good reason for establishing a strong relationship with your financial institution.)
Save your tax refund – Instead of spending your tax refund, save it.
Save your spare cash and change – Over a few months, you’d be surprised by how much money you could set aside.
Save any time you enjoy extra profits – When you’re enjoying higher-than-normal profits, set the money aside.
Continually evaluate the amount to save – Always be realistic and start slowly before you accelerate your saving.
Use direct debit – With a clear picture of your cash flow, you’ll be able to use a direct debit into your emergency fund every month.
Be judicious – Don’t be lackadaisical. Avoid impulse buying. Plan ahead and specify what you’ll consider what are emergencies. Only use your emergency fund for true emergencies.
Review and cut back on outsourcing and other variable expenses – While fixed expenses such as rent are necessary, some outsourcing of business functions are helpful but not all are necessary. Indeed, face-time is important in business relationships, but determine whether you really need to take certain trips and whether teleconferencing software will suffice. Save the money for your emergency fund.
Consider your emergency fund to be sacred – Treat your emergency fund and a non-negotiable line item.
Consider a financial advisor – If you’re able to hire a financial advisor, ask for advice and support on your approach to an emergency fund. But make certain the person is a fiduciary, who has a legal obligation to act in your best interests.
Use the right software – It’s a good idea to use bookkeeping software in financials for planning your emergency fund.
Strategize for more cash flow – Look for ways to generate and accelerate more cash whether in new products or developing multiple revenue streams.
Make saving a team adventure – Involve your employees. Regularly stage contests to generate ideas from your team.
Continually motivate your sales team – By setting new sales goals with monetary prizes and other awards.
From the Coach’s Corner, here are related tips:
Best Financial Strategies for Your Business Plan – When updating your business plan as an established company or writing it as a startup, be sure to intensely focus on the financial section. Here’s how.
Angel Investor: Tips for Increasing Cash Flow, Profits — A successful angel investor shares his tips for good cash flow and other profit issues.
Finance: Zero-Based Budgeting Aligns Resources with Priorities – Zero-based budgeting (ZBB) is no longer just your average budgeting technique. ZBB means all expenses must justified for all functions and analyzed for company needs and costs. Here’s how to convert to ZBB.
Cutting Costs: 9 Best Practices to Avoid Making Reactionary Decisions — In chaotic times, it’s common for businesspeople to be fearful and reactionary when they feel they must cut expenses. But entrepreneurs need to be unemotional so that they make decisions that will bolster their objectives. They can take the emotion out of their decision-making — by eliminating stress factors — if their priorities are clearly defined with values.
Secrets in Motivating Employees to Offer Profitable Ideas – Here’s how managers can have beneficial relationships with employees so they can elicit profit-making ideas.
“Money looks better in the bank account than on your feet.”
-Sophia Amoruso
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