Every business needs an emergency fund to cover unexpected expenses. Changes in the economy, regulations or the tax landscape can also result in financial fluctuations for a business, and this can be intimidating without a safety net.
When you’re on a small-business budget, finding the resources to invest in your emergency fund is often difficult. However, there are ways to set aside money without impacting your available cash too drastically. Below, 13 members of Forbes Finance Council share tips to help you build up your business’ emergency fund.
1. Keep At Least 10% Of Annualized Revenue In The Bank
Have cash on hand. We advise that 10% to 30% of annualized revenue be in the bank, which equates to having three to six months of expenses saved up in case of an emergency. That will aid in making good decisions, not the reactive decisions that are often made in economic uncertainty. - Jody Grunden, Summit CPA Group
2. Implement A Decision-Making Process Around New Investments
This may sound obvious, but every time we spend cash—even if it’s within the budget—it’s a lost opportunity to save cash. Simply pausing to consider this trade-off can lead to better outcomes. This can effectively be enforced via a light, but formal, decision-making process around new investments. Follow the framework for new spending decisions and the results after six months will impress. - Erica Schoder, R Street Institute
3. Anticipate Slow Periods Based On Your Seasonal Revenue
There is oftentimes a correlation between monthly revenue and seasonality with most businesses. For example, if a business relies on weekend sales and there is one less weekend in a given month due to the way the dates fall, this could have a huge impact on revenue and cash flow. Planning for this is super important, and creating a rainy day fund could protect a business when downturns occur. - Ryan Rosett, Credibly
4. Forecast High
Each business has a completely different set of challenges and needs. Assessing what could go wrong in worst-case scenarios will help you map out what is needed for an emergency fund for the business. Just as in personal planning, forecasting high is a prudent decision. - Stephen Bruce, The Family Office Group, a marcus evans Company
5. Automate Your Savings
Set up an automatic savings plan so you don’t think about it. Determine your cash cushion needs (typically a certain number of months’ worth of expenses) and have the bank automatically transfer a specific dollar amount into a separate account each week. This can be done until you reach your goal or in perpetuity to create an even larger cushion that can be used for future opportunities. - Chris Tierney, Moore Colson CPAs and Advisors
6. Transfer A Small Amount From Each Transaction
Treat the process just like you would enforce automatic savings for your personal life (e.g., a 401(k)). Take a small amount of every collection transaction you have and move it to a separate bank account with your current bank. The important aspect is that this account is separate from your operating account. Also, put these savings in your cash forecast so you don’t forecast to spend it. - Aaron Spool, Eventus Advisory Group, LLC
7. Know How Much You’ll Need To Keep Running
Be very mindful of how your business can adapt. Depending on the windfall, whether the economy tanks, laws change or taxes go up, set aside enough to handle any scenario. Gather your books and find out how much you would need to set aside to keep your business running in a worst-case scenario. Start slow if you need to and build it over time. Set a goal amount and strive to achieve it. - Greg Herlean, Horizon Trust
8. Continually Reevaluate Your Monthly Operating Expenses
Beyond maintaining a three-month emergency fund, business leaders need to understand how growth—or a contraction—impact the reserve. High-growth organizations can protect themselves by understanding a single month’s operating costs and reevaluating that number on a quarterly basis, while more stable businesses can incorporate the monthly cost analysis into annual financial-planning exercises. - Shawn Sweeney, Spinnaker Consulting Group
9. Plan For The Worst-Case Scenarios
Companies must understand all worst-case scenarios possible in a three-year horizon, as well as sources of capital versus possible drain on capital, beyond the usual course of business. There should always be an attempt to manage leverage so that unexpected calls for capital can be managed through available undrawn debt lines. - Pritimukta Sarangi, Tata Communications
10. Take Care Of Your Needs First
Have enough set aside to manage payroll and benefits. Then you can start on an emergency fund. If you aren’t saving fast enough, find ways to cut costs. You may have to move your office space to somewhere cheaper. Manage your money like an adult and not an 18-year-old kid who can fall back on mom and dad. Spend your money the right way and you’ll be able to save. - Jeff Pitta, Medicare Plan Finder
11. Save Larger Amounts During Good Times
Try to maintain three months’ operating expenses in your cash reserves. To do this, set aside money in a separate, linked account. Make it a habit to deposit a small, recurring amount as you’re able, and transfer larger “windfalls” in good times. This discipline will help build a cushion for when sales may slump or the regulatory environment changes. - Luz Urrutia, Opportunity Fund
12. Open An Interest-Bearing Savings Account
Automate your bank account to deposit a set amount that you’re comfortable with into a separate account on a monthly basis. Just set it once. As a busy business owner, you may not remember to do this manually when you’re managing a thousand things. You can avoid having the money simply “sit there” by placing it in an interest-bearing account. - Joe Camberato, National Business Capital & Services
13. Build Unplanned Expenses Into Your Projected Profit Loss
Miscellaneous and unplanned expenses happen constantly in any growing business. Whether this is something like a change to the economy or a lawsuit, you should constantly be planning for the worst and build this into your projected profit loss. If you end the year and there are no miscellaneous expenses, you then have an added bonus to cash flow and can reinvest back into the business. - Jonathan Moisan, Advertise Purple
