When you go on vacation this summer, you hope the weather will be nice and sunny, but you should still bring an umbrella just in case. In business, the future can be similarly unpredictable, and, like an umbrella, a rainy day fund can help your business successfully ride out stormy weather.
Establishing an emergency fund isn't as daunting as you might think. Get started and manage your savings with these smart money-saving tips.
Why You Should Have a Rainy Day Fund
Every business runs into a slow stretch from time to time, and there are a number of things that could happen that could impact your business plan. For example, what if your equipment breaks down or your building needs repairs?
Without an emergency fund, you might need to go into debt to pay your bills or feel compelled to cut back on key purchases (for example, restocking your inventory). A rainy day fund can help you cover expenses during lean months, which can help you avoid having to take drastic steps to keep your business afloat.
An emergency fund can also help give you more confidence when it comes to running and growing your business because you know you can handle a slow stretch. You don't have to second-guess your decisions because, even if an idea doesn't work out, you can fall back on your savings.
How Much You Should Save
Look at your monthly expenses. How much do you pay for salaries, rent/lease, utilities, loans and other operating costs? Your emergency fund should be enough to cover three months of expenses so you can survive a slow stretch. More would always be useful, of course, especially if your business cycle is inconsistent and your sales are hard to predict.
How You Can Save
Building an appropriate business emergency fund may seem daunting. You need to take the challenge one step at a time. Check your monthly budget for wiggle room, then set a monthly savings goal for your rainy day fund.
Beyond that, watch out for opportunities to free up funds that you can put toward your savings. For example, try negotiating a lower price with your vendors and put any monthly savings into your fund. If you finish paying off a business loan, consider putting the monthly payment amount in the emergency fund.
If your business is cyclical, save as much as you can during your busy season so you are prepared for when things slow down.
Where to Keep Your Savings
You should keep your rainy day fund separate from your regular business checking account. Otherwise, it can be tempting to spend the money on regular bills. Remember, your emergency fund should just be for emergencies, when you do not have any other options.
A standalone savings account is a good choice. This way, the money is set aside from the rest of your business accounts, but you can easily access it when you need to. You could also consider putting the money in bank CDs or money market accounts.
As a best practice, you should not keep your emergency fund in investments like stocks. As the value of stocks can change, if you need to access your money during a market downturn you could end up having to sell your stocks for a loss. Keep your savings in accounts that cannot lose money.
We hope your business stays strong and you never end up using your rainy day fund. But by following this advice, you can help prepare for any surprise expenses that may come your way.
Grab your cap and gown and come back next Monday when we'll wrap up our Small Business Summer School series. See you then!
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