Have you ever seen the phrase “money speaks”? . . But all I say is goodbye”? It's easy to laugh at statements like this when they don't really make sense. But when cash flow problems and money emergencies become a business topic, it's never funny.
life no matter who you are intention Let’s throw your business a curveball. That's a promise. A downturn in the economy, equipment failure, or even a global health crisis will at some point derail financial projections. But your business doesn't have to be destroyed just because something unexpected happens.Can withstand severe storms if You have a business emergency fund.
Proverbs 21:20 (New Translation of the Bible) says, “A wise person stores up choice food and olive oil.” In other words, smart people save money. So, whether your business is big or small, just getting off the ground or established, it's up to you to build your business emergency fund wisely. Here we've covered the basics to help you get started.
What is a business emergency fund?
Why does my business need an emergency fund?
Does your business need to be debt-free before you can start saving?
How much does a company have to save?
When can I use my business emergency fund?
What is a business emergency fund?
A business emergency fund is money that you keep in your savings or checking account for unexpected financial challenges your company faces. It's a good idea to keep this cash separate from your business bank account in a high-interest account, such as a money market account.
In the accounting world, a business emergency fund is part of capital reserves or retained earnings. A business leader uses retained earnings for her three purposes: emergencies, investing in the business, and exploiting opportunities.
Why does my business need an emergency fund?
An emergency is an emergency because it happens suddenly, right? Who would have thought that your biggest customers would cancel their orders, or conversely, that they would place a large number of orders that you had to fill in a hurry? The problem is, on a payroll-by-payroll or per-crisis basis. When you're running a business, emergencies like this will eventually occur and derail your plans. Not if you have cash set aside. Ready to bridge gaps, deal with the unexpected, and keep moving forward.
Having a business emergency fund will help you prepare for situations such as:
- cover unexpected expenses
- Deal with poor sales until business recovers
- Responding to customer issues such as order cancellations
- Surviving disaster and chaos
- Avoid debt by becoming your own bank
Some business advisors now tell you to take out lines of credit, small business loans, or dig into your personal savings to keep your business afloat in the event of an emergency. But what happens when creditors come calling before you're ready to pay them back? That increases the likelihood of bad money decisions and even more debt. Having a lot of savings will keep you out of debt until the storm has passed.
Does your business need to be debt-free before you can start saving?
You may be wondering whether you need to pay off all your debt before you start stashing away money, especially if you're familiar with Ramsey's 7 Baby Steps. That's a great question, but a quick no.baby steps are your plan personal finances. He saves $1,000 for his first emergency fund. Then use the extra cash to pay off all your debts (except for the house) and save towards your eventually fully-filled emergency fund.
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However, the process by which business owners achieve financial freedom is different. Rather than tackling one bucket at a time, EntreLeadership recommends dividing your business profits into two buckets each month:
You can choose how much to put in each bucket, but here are some recommendations:
- If your business is in debt, adjust your personal salary to a living wage. Pay yourself enough money to live comfortably but modestly. (No matter how much you like rice and beans, you probably don't want to eat them for every meal.)
- Then split the profits, using more money to pay off debt and less money to save. For example, let's say you use 80% of your profits for debt and 20% for retained earnings.
Is it difficult to pour into different buckets at the same time? Absolutely. But if you focus and increase your intensity, it's 100% doable and will reap rewards that money can't buy, including less stress and more time for the people and things you love. EntreLeader Boyd Smith summarized his own experience following EntreLeadership's small business financing strategy:
“This plan is not easy, but it is great,” he said. “Using this, my business, including an office building, became 100% debt-free. Thanks to retained earnings, my team's sales and bottom line grew significantly.”
Boyd admits that growing up at the speed of cash was tough on his ego. “A lot of my business friends run bigger, flashier businesses,” he said. “But they have investors, debt and a lot more stress.”
Plus, those guys work longer hours and take more risks than Boyd, but they don't bring home any money. “Working as fast as cash is a great way to make a living.”
How much does a company have to save?
Prepare for impact. That's a big number to swallow, but trust us when we say it's worth it. The goal for retained earnings is to have approximately six months' worth of working capital saved in cash. I'll be the first to tell you that it will take time to get there, but as the famous saying reminds us, “You eat the elephant one bite at a time.” With these tips, you can grow your business emergency fund no matter the size of your business budget.
1. Set up automatic forwarding.
Open an interest-bearing bank account just for retained earnings and set up automatic monthly deposits. You will be surprised when you see your balance increasing month by month. Please remember. emergency Resist the temptation to raise money and dip into it except in true emergencies. Tip: Unless your team members are sitting on the floor, those fancy new office chairs aren't an emergency. Stay fit and save money!
2. You can save more when the economy is good.
If you are a fan of Tom and Donna parks and recreation, You know what it's like to treat yourself. (Today is the best day of the year.) But you don't have to be a fan to understand the temptation to splurge when you can afford it. Our advice: don't do it. As your sales increase, put more money into your reserves to reach your savings goal. You have this! When you are truly ready to treat yourself, all the temptations calling your name are still there.
3. You can never save too little.
Saving large amounts of money is not always practical. Especially if your business is small and you're living on rice and beans to build it. But every penny saved is another penny in your business' emergency fund.And that penny you saved for the future intention They multiply over time. Slow and steady wins the race.
When can I use my business emergency fund?
At the risk of sounding like a broken record, the Small Business Emergency Fund is only used for business emergencies. It's meant to help you weather the financial storm.
Is the desire for the latest truck models and fancy office furniture an economic storm?
Will it cause financial disruption if the equipment I need to make money breaks down? Yes.
What if you have problems collecting from customers and can't pay your salary? Yes, that's a storm too.
Now, here's a trick question. Is low cash flow during the slow season a storm? It can't be. Because you can plan for a drop in revenue during the off-season. Just like a squirrel gathers nuts for winter, you can save up cash during the busy season to support your team during the slow season. And yes, keep that extra money in your emergency fund.
Once you have a certain amount of money saved and a regular saving rhythm, you can start living a fun life. Not only will you avoid financial mistakes and deal with financial curveballs, but you'll be ready to take advantage of great opportunities that come your way without the burden of debt.