We all know the feeling when a huge sale hits – dinner out to celebrate, some retail therapy, and finally feeling like you have your head above water for once.
But what happens when the well runs dry? You know what we are talking about – the sales won’t seem to close, the leads come to a halt, and your best clients start working with the competition.
The question isn’t whether you will have a dark day…it’s when? Having an emergency fund for your business is critical to save your business (and you!) from those hard seasons. Here are our best tips for how to start an emergency fund for your business.
What is an emergency fund?
The purpose of this ultra-low-risk, interest-bearing account is to create a safety net that you can use to fund short-term financial hardships. Every business should have a three-month reserve, meaning that, if not a single sale came in, all costs could still be covered for three months (a quarter).
Set Ground Rules
It can be tempting to want to pull the money you worked hard to save out of the emergency fund at any moment, but it is imperative that you set ground rules for when and for what purpose withdrawals will take place. For example, if the money is pulled due to a drop in sales, you will also need to have a plan in place to get more sales and cut all the related costs in your business within two months if things haven’t improved. Your rules for utilizing these funds must meet your set criteria (i.e. you have a situation so dire that you need to access this money) and have instructions written in advance on how to proceed. Few people have the discipline to think clearly or act appropriately in times of panic, and that’s why we document a simple set of instructions for ourselves in advance!
Now that you understand how your emergency fund works, you need to decide where you will pull the money from. We always advise our clients to take a percentage of their profits and save them towards building up this fund. Then at year-end, they take the saved profits and deposit them into an interest-bearing account to be stored when needed. Whether you decide to allocate funds quarterly or even take a percentage of your total sales, find a rhythm that works best for you and stay consistent…and stick to your ground rules!
The goal of the emergency fund is not to buy time. It may afford some time to address unexpected challenges, but it is really about forcing important decisions early, so your business doesn’t go into a cash crisis!
Not sure how to start an emergency fund for your business? We want to help you make these important decisions in your business so you can stay in front of any future financial impacts. Getting started with one of our profit professionals is totally free – schedule your consultation today!