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7 Easy Tips to Build A Small Business Emergency Fund

How To Build A Small Business Emergency Fund?

Cash flow is one of the major concerns for small businesses, there is no doubt about that. Ever since Covid-19 surfaced, the economy has been on the frits. On top of that, changes in the tax regulations can put incredible strain on the business revenue. Therefore, every SME needs an emergency fund to manage its finances in times of a crisis like these. 

It can be incredibly difficult for a small business owner to find financial resources to invest in cash reserves. However, if you pay a little more attention and try out a few alternate ways, there are some measures you can take to keep aside some emergency cash without drastically affecting your current cash flow.

Below, we have shared all the tips that can help you set up a small business emergency fund. Keep reading to find out more.

Emergency fund written on a piggy bank.

What is a Small Business Emergency Fund?

A business emergency fund is a small amount of money that you have stockpiled in an emergency money market account. We also call it the money saved for rainy days.

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Ever since the pandemic began, a countless number of small businesses have taken serious hits. As cities went under lockdown and businesses were shut down, not many businesses could survive the no-income phase and were completely closed off.

We are not saying that small business emergency funds came into being after Covid-19. It has always been a part of a business domain. But since the pandemic, SME owners realized its importance for their setups and are now more focused on setting it up.

There are various benefits of setting up cash reserves for business, and it does have its downsides. Let’s take a look at the pros and cons of setting up an emergency fund.

Pros & cons of the small business emergency fund

Having an emergency fund set up might seem like a very simple and easy thing to do. But it’s not that easy, and those with running businesses would definitely agree. Most business owners say they all have cash reserves arranged because they’re well aware of its need at some point. But how beneficial do these cash reserves are, and what are their setbacks? Let’s find out.

Pros

  1. You won’t have to risk being derailed by a financial setback. There are a variety of issues that can surface when you’re running a business, i.e., the owner falling ill, recession, or decline in the interest of the product. Having a reserve of cash will allow you to get through these tough times.
  2. In case your business has a financial setback, you will not have to cut down your personal funds. Your reserved cash will take care of the business while your personal finances won’t take the hit.
  3. When there is a drop in revenue, you might have to face fines and credit issues if you aren’t paying bills on time which can be easily avoided with a cash reserve. 

Cons

  1. Building a typical emergency fund will limit your investments. Since you’re putting money in the reserve, you will not be able to spend freely on expanding your business, and you will have to take calculated risks.
  2. You won’t see a massive return, especially in terms of a liquid emergency fund.

So, these were the pros and cons of setting up a business emergency fund. In our opinion, the pros do outweigh the cons. Whenever there is a financial setback with an SME, the first thought of a business owner is survival. And survival is only possible if you have some extra money in your hands.

Moving on, let’s see what helpful procedures you can employ to efficiently build a small business emergency fund.

12-month emergency fund

How to Build a Small Business Emergency Fund?

While saving money is a habit that we all know we must adopt. Implementing this habit on yourself can be a very tough job, especially where your business is concerned. If you’re running a small business, it is important to keep a cash reserve aside so you can benefit from it when needed. Here is how you can do it,

1. Prioritize non-negotiable expenses

When a business takes a financial hit, the first step any business owner takes is to cut down on their expenses to meet their ends. In such kind of a scenario, you need to figure out what are your non-negotiable expenses.

You will probably need enough money to pay for utilities, mortgage, and bills depending on the kind of business you own. And if you have employees, their payroll is non-negotiable. You cannot cut down on these expenses.

What will help you the most is the knowledge of what you can cut down on and what you can’t. It will save you a lot of trouble.

2. Enforce a strict decision-making procedure around new investments

Well, that’s pretty obvious. Every time you make an investment, you lose an opportunity to save m. Even if your investment is within the budget, you still lose money. That’s why you need to implement a strict decision-making process around every new investment. Doesn’t matter how small the investment may be. 

Stop for a moment, let the decision-making body consider all the benefits of this tradeoff. If you follow this framework for every new spending decision, the results after 6 months will definitely surprise you.

3. Keep track of the seasonal cash flow

If you’re confused regarding what are seasonal businesses, we’ll shed some light on that. Ice-cream parlors, resorts at the beaches, snowboard stores are seasonal businesses. So if you have an SME where your income slows down for a couple of months, you need enough cash on deck to get you through that.

Most seasonal business owners devise their yearly plan according to the seasons in which they know their income will be active. But, other SME owners should also be aware of the seasons and prepare for slower months if there are any.

4. Take a small step

Set realistic and reachable goals. Setting up an emergency fund for your businesses is obviously going to require thousands of dollars which might scare a lot of people. Hence, they never start saving at all.

Remember, you cannot take the last step before you have even begun. Start slow and start small, and you will eventually achieve your goal. One efficient way to do it is to allocate a percentage of every sale to your emergency fund. This way, you will not even notice when your emergency cash reserve gets loaded with money.

5. Don’t forget to save more in good times.

Obviously, there will be certain times when your business will be booming. So, you can’t forget to save in these times as well. You can also take a certain percentage of your revenue during your success months to expand your business. If you keep a growth mindset, you will never be disappointed, and your business will be succeeding through leaps and bounds.

6. Don’t mix your personal and business savings account.

For a small business owner, it is very easy to combine your personal and business expenses. But you need to keep it separate for the good of your business which is an art you must learn.

Previously, people used to recommend keeping both these savings accounts together. Still, as much as we have researched, in the long run, this technique will make it difficult for you to keep track of your cash flow.

You may assume that you have enough in your bank account for an emergency, but you won’t know which emergency. So, it is better to keep both these accounts separate and prevent any confusion from happening.

7. Take help from a financial advisor.

Making financial decisions can be very difficult. This is where you can get help from a financial advisor. Anytime you think your plan isn’t working and you need emergency cash that you may not have, you need to contact someone with a professional background who has experience setting up these cash reserves.

They will be able to guide you more thoroughly depending on your business. You will be in safer hands, making decisions you’re well educated about.

The Bottom line

As you can see, setting up an emergency fund for your small business is imperative. You don’t wanna risk your business and its growth by not having a backup plan which is exactly what an emergency fund is.

When you have money put aside for unexpected expenses or events, you will have peace of mind that you will be able to get your business through a tough time without having to rely on somebody else. It is difficult, it takes a lot of time and persistence, but you can set up this fund with utmost determination.

Setting up businesses isn’t easy. It takes all of your savings and effort to do it. Won’t you like to protect it from rainy days? We are sure you do, and this is how you can, by keeping emergency business cash aside. Hopefully, we have given you a lot of perspective in this regard. We did our best to address a lot of concerns over here. Just try your best, and you will be able to adjust your revenue in a more informed manner.

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