Emergency Funds for Your Business

The 2009 global economic crisis just taught thousands of business owners that it is important to tuck away some cash so that they can survive in case of a disaster. Any successful business sometimes encounters unexpected emergencies such as earthquakes, fires and floods. Such calamities can lead to financial emergencies. What makes the difference is how the business deals with such emergencies, and this is where emergency funds come in.

Emergency Funds for Your Business
  • Save

What is an emergency fund?

An emergency fund is used by a business to set aside some money needed in case of a financial dilemma. The business opens and operates an account exclusively meant for emergency situations. The main aim of the fund is to improve financial security by establishing a net of funds to be used for unexpected expenses. Most financial experts recommend an emergency fund to contain enough savings that can secure at least three months of expenses. Businesses often refer to emergency funds as debt-free means of withstanding any financial shock that might come their way.

How to create an emergency fund

Plan for the unexpected

It is no secret that a financial crisis can strike anytime. It is not possible to accurately predict the situations that might transpire, but you can make some efforts to prepare for the worst. One of the first steps in establishing an emergency fund is planning for the unexpected. Make a list of possible events that might prompt you to use the funds. Some of these events may include drastic shifts in consumer demand, economic recession, negative reputation, natural disasters and unexpected increase in the cost of production. Look at the type of business you do and the surrounding external factors that affect its scope of operation. Some businesses are more exposed to certain risks than others. For instance, some business may be at higher risks of legal suits and actions. An emergency fund should cover all the possible risks.

Create an emergency fund account

Like your personal account, you should create an emergency fund account that is separate from the business account. A separate account will reduce the temptation to dig into the emergency funds to sort out non-emergency financial needs. The account should be off-limits until the unexpected happens. Go with an account that is easily accessible. Avoid any account that charges exorbitant fees or one that has withdrawal penalties.

Make a savings goal

You need to decide the amount you want to save every month. It is good to save an amount that can cover all the operating expenses for at least three months. Before you determine the amount you want to save, take a close look at your bills, the payroll and operating costs. After that, you can comfortably and easily figure out the total saving goal. However, the nature of the business might require you to save money that can cover expenses for more than three months. Some of the factors that may prompt you to save for more than three months include high business risks, volatile product demand, stringent government rules and limited insurance. If you identify with any of these factors, you may want to save and cover at least a one-year expense.

Put the needs of the business first

Start small and put the needs of the business first. You need to pay yourself first and benefit from the business. There is no point of having a business that does not reward you. Though disasters exist, the amount you save does not have to be larger than the amount you take home on a daily basis. To make it simpler, think of an emergency fund as a form of a monthly utility. Make a schedule and calculate the amount you need to deposit per month.

What if you don’t have an emergency fund?

A business is never complete without challenges. In case you don’t have an emergency fund to put things back together, there are a number of options you can consider. You can apply for a quick loan in the form of a cash advance from a bank. You can also go for an auto title loan from a reputable lender. The good thing about title loans is that you get the cash in minutes or hours. In addition, you don’t need a lot of collateral to secure the loan. As long as you are willing to provide the title of your vehicle as collateral, you will get the money easily. However, you must be aware of people who use title loans to exploit others. Do some background check on the lender before you contact him or her.

In conclusion, an emergency fund is one of the key components that should appear on your business plan. You don’t have to scratch your head off to make an emergency fund work in your favor. The tips discussed above will help you come up with an emergency fund account and secure your business financially. In case you have doubts, contact a financial specialist for more insight on how an emergency fund works.

Can't get enough of Your Life After 25? Keep up with latest posts & events by subscribing to our newsletter, and never miss a thing!

Related Posts

Share via
Copy link
Powered by Social Snap
Find Your Influence