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While it’s common for businesses to face cash shortages occasionally, having a strategy, such as an emergency fund, to bail you out of such situations is critical. Statistics indicate that 66% of small businesses have experienced financial difficulties. Maintaining an emergency fund ensures your company doesn’t incur additional debt and that you don’t use up all your personal savings to cater to business expenses. This keeps you from compromising your personal and business financial standing.
A solid business emergency fund covers unexpected emergencies resulting from flooding, fires, and other disasters or occurrences that may cause business interruption. It’s the best way for your organization to get ready for economic downturns. A business emergency fund makes it easier to cover operating expenses during a recession. It helps safeguard your business credit by eliminating the need to depend on credit to remain afloat during financial challenges.
With a restricted budget, setting money aside for unexpected expenses isn’t easy, but it’s doable. Outlined below are five tips for building an emergency fund for your business.
1. Determine Your Emergency Fund’s Target Amount
The amount to put away in an emergency fund significantly varies based on your operational costs and other elements that affect your business. When determining how much to save in your business emergency fund, consider:
- Your business structure: Based on whether you operate a sole proprietorship or have employees, think of how losing revenue can affect your ability to continue business operations.
- Inventory and receivables: If your business carries inventory or its receivables are slow-moving, your reserve should have more money in it.
- Seasonality: If you run a seasonal business, consider putting more in the emergency fund.
- Your financial position: If you have personal savings, foregoing a paycheck for some time can help you direct a significant amount into your business reserve.
While getting a business loan, including loans on car titles, is easy, setting up an emergency fund for your business is important. Knowing how much to put away in this reserve can help make it easier to plan your finances. It’s recommended to save at least three months’ worth of business expenses.
2. Start Small
When setting business emergency-saving goals, you must ensure your objectives are attainable. The feeling that you may require a lot of money in case of a financial challenge, yet you’ve saved nothing, may discourage you from putting money aside because you think you may never achieve your emergency fund goals.
Nevertheless, setting small targets you can easily achieve can help keep you on track. Attaining these small targets motivates you to continue saving towards the end goal. Start small and consider increasing your monthly savings as revenue rises.
3. Cut Your Business Expenses
Finding ways to cut your business’s monthly expenses can leave you with enough money to establish a company emergency fund. However, this can be tricky, particularly if you don’t know where to begin. The following alternatives can help you lower your business’s ongoing costs:
- Shopping around for office supplies and comparing prices to find affordable ones
- Comparing insurance providers to find the most competitive rates or consolidating insurance policies
- Avoiding unnecessary debt
- Modernizing your marketing efforts
- Avoiding unnecessary finance charges like interest rates and late payment fees by paying your bills and loans on time
- Renegotiating your business contracts
- Operating your business remotely
- Saving staff-related costs
If you have trouble reducing business costs, hiring a professional, such as an accountant, to create an effective cost-cutting strategy can come in handy.
4. Automate Emergency Fund Savings
Since setting money aside for your business’s emergency fund can be challenging, it’s important to have a strategy that helps ensure you’re constantly saving. Also, you might forget to manually put funds away every month due to the hassles of running a business. Automating your emergency fund savings is the best way to achieve this. It helps you overcome the temptation to spend the money on other things. This solution’s saving consistency makes it easier to meet your financial goals.
Automating your savings allows you to leverage compound interest, increasing the potential for your money’s consistent growth. Building a saving habit is vital for your business’s financial health, which isn’t easy. Nonetheless, putting your company’s emergency fund savings on autopilot can help.
5. Adhere to a Business Budget
Without a budget, it’s easy for businesses to overspend. A budget keeps your company from overspending while ensuring all consistent expenses are catered to on time to avoid penalties. A business budget makes it easy to identify unnecessary expenditures and areas where you can save.
Budgeting helps you plan your business finances, making it easier to prepare for emergencies. With an effective budget, your company can pay off its debts quickly, leaving you with enough money for a reserve. A comprehensive business budget should include things like:
- Rent (for businesses that lease space)
- Professional services such as IT services and a tax expert
A CFO can help you create a budget that caters to all your business needs, an emergency fund included.
Almost all businesses struggle with cash shortages at some point. However, establishing an emergency fund can help them stay afloat. Implementing these tips can help make it easier to build an emergency fund for your business.