How to establish a small business emergency fund
The coronavirus pandemic quickly caught businesses off guard. A fortunate few had the type of business that was not affected by shelter-in-place orders, but many, many others were hit hard by the double-whammy of lost business and a lack of a rainy-day fund.
According to the SurePayroll Small Business Worry Index, “Due to the nature of small businesses, it can be hard to ensure there is enough cash on hand for business expenses and payroll. One finding from the study showed that 1 in 4 small business owners worry about being able to cover payroll at some point in the year.”
So how do you create a rainy-day fund and how much do you need? It’s really just a simple 4-step process.
Step 1 — Analyze your core expenses:
Make a list of the expenses that you have to cover every month, things like payroll, rent, taxes, insurance and utilities. Other items, the ones that are more wants than needs, should not be on this list. That would include items such as marketing and entertainment.
Now, multiply that core number by three. That is the number of months of overhead you ideally will (eventually) set aside. So if your core expenses are $5,000, you need to begin to save $15,000.
Step 2 — Chunk it down:
If you look at $15,000 by itself, it will likely look like an insurmountable mountain. But guess what? No one climbs a mountain in one step. Mountain climbers chunk it down.
Step 3 — Get help:
Making and hitting financial goals can be challenging, and that is why bringing in an accountant or financial advisor makes sense. Meeting with a financial advisor can help you understand how best to begin, where you can safely cut back, how to save, and will help ensure that you are saving the right amounts.
And, having an advisor who understands the finances of your business can also help if and when you do have an emergency down the road. An expert teammate can give you expert advice.
Step 4 — Commit:
The key here is to save a bit each month. That takes good old-fashioned commitment. In the end, by committing to this plan, not only will you have learned a new skill (how to save) but you will not be caught off-guard the next time your small business faces an emergency situation.
To read the entire article, visit the Small Business Community.
A note from your Small Business Specialist: To discuss your business goals, set aside some time for a telephone call.
MAP3243286 | 09/2020