Strength and Resilience: Why You Need an Emergency Fund for Your Business
🕐 Read Time 4 Minutes
Unplanned events like home repairs, car breakdowns, or medical expenses — life sure has a way of throwing us for a loop just when it seems like everything is going smoothly. And it’s far too easy to lose your footing on your financial journey when you’re not prepared financially to face life’s challenges.
A personal emergency fund can act as a savings buffer and help you face the unexpected without taking a significant financial hit. “Saving for a rainy day” and having emergency savings can give you peace of mind and offer financial security through uncertain times.
Just as unforeseen events can disrupt your personal finances, your business can also face unpredictable challenges that threaten its financial stability. It’s crucial to have an emergency fund for your business to help provide a layer of financial security — expecting the unexpected and being financially prepared can help your business survive any challenges that come your way.
Small Business Risk Management
As a small business owner, you know that financial uncertainty is a constant risk to the survival of your business. Unexpected expenses can unfortunately arise at any time and have a significant impact.
According to a recent report by the Federal Reserve on small businesses, 94% of small employer firms surveyed experienced a financial challenge in the previous 12 months. Some of the most common challenges firms faced were the rising costs of goods, services, or wages; difficulties paying operating expenses, and navigating uneven cash flows.
Is your business ready to meet a financial challenge?
What if your equipment were to break down and need repair or replacement? What if a large order, substantial to your revenue, was suddenly canceled by a regular customer? What if a market downturn were slow to reverse and continued to hurt your sales? These unexpected events can derail your business financially if you’re unprepared.
Having a business emergency fund helps your business absorb these financial shocks without jeopardizing its operations. Building emergency savings into your business budget helps create a safety net to weather any financial storms that may come your way and increase your business’ resilience.
If your business is seasonal and has peak and off-peak periods, you’ve likely experienced fluctuating income throughout the year. You also know that smart cash flow management during low revenue months is key to your business’ financial security.
A business emergency fund can act as a financial cushion, allowing your business to cover fixed operational costs such as rent, salaries, and utilities even when your income is low. And when revenue picks up again in your peak season, you can replenish that emergency fund to be ready for the next challenge.
A business emergency fund is also important if your business is flourishing and growing rapidly. A rapid influx of orders; increasing your product production; expanding your business if the time is right — having an emergency fund can help you capitalize on these opportunities and continue your forward momentum.
How Much You Should Have in Your Business Emergency Fund
So how much exactly do you need to save for a rainy day for your business?
A good rule of thumb is to set aside enough to cover 3-6 months of operating expenses. Ideally, 10% of your monthly revenue is recommended for a solid, effective emergency fund.
The amount you save in your business emergency fund should be tailored to your specific business needs and industry-specific risks. Is your business a tech start-up? You may need a larger emergency fund to protect you from the volatile ups and downs of the tech industry.
Don’t neglect the balance between your business’ fixed and variable costs: if you have high fixed costs, like rent and salaries, you’ll likely need more substantial reserves. Also, make sure to factor in any revenue volatility — if you have more unpredictable income streams, you may need a larger emergency fund to cover potential shortfalls.
How to Build and Maintain Your Business Emergency Fund
Setting up your business emergency fund involves an initial assessment of your current financial status to understand your starting point. Review your business financial statements, cash flow, and existing savings. Set realistic goals for your emergency fund, based on your business needs and industry standards.
Create a savings plan, just as you would for your personal finances, and allocate a consistent percentage of your business profits to your emergency fund. Make it even easier to save by setting up an automatic deposit to a separate business savings account solely dedicated to your emergency fund.
Your personal emergency savings fund didn’t reach its current balance overnight; your business emergency fund also won’t be established in an instant. Don’t be discouraged. Contribute to your business emergency savings consistently over time, even if it’s in small amounts: every penny counts! Even when your business is doing well, consider making additional deposits to your emergency fund to speed up meeting (or exceeding!) your savings goal.
When to Re-Evaluate Your Emergency Fund
You should regularly review your business emergency fund to make sure it can still meet any financial challenges your business may encounter. Consider re-evaluating your emergency savings fund at least quarterly or bi-annually to ensure it’s adequate.
Any significant changes in your business’ revenue or expenses also warrants a reassessment of your emergency fund. If your business experiences a substantial increase in operating costs, you may need to increase your emergency savings accordingly. If you expand or downsize your business, you’ll also want to adjust your reserves accordingly.
Economic conditions and industry trends can have a significant impact on how much you should have in your business emergency savings. You can actively maintain a robust savings buffer by staying on top of market indicators and your business environment. Bolstering your emergency fund can help ensure the resiliency of your business in tough and uncertain times.
Don’t Just Survive Financially, But Thrive
A business emergency fund is key to any business’ financial strategy — it helps to ensure business continuity, provides security in times of low revenue, and helps manage unexpected expenses. By setting up emergency savings for your business, your business will not only be better able to navigate financial uncertainties but also sustain growth in the long term.
At Financial Fitness Coaching, we love working with small business owners to help them create financial strategies to help their businesses survive, thrive, and grow. We can help you strengthen your business’ financial resilience so you’re prepared to meet any financial challenge head-on. Download our CFO Checklist to start increasing your business’ financial fitness today.