If you’re the owner of a company or a manager with control over the budget, you know that sometimes money can get a bit tight. Things are grand when there’s plenty of cash flow, but there are lean moments in every business. Those who are wise plan for moments like these by putting aside an emergency fund and saving for business expenses.
Finding that cash to set aside can be a challenging proposition. However, if you’ve ever asked, “How do I save an emergency fund when money is tight?” you’re in luck. In this article, we’ll discuss how to build up savings and how much to put in an emergency fund.
With the following tips, you’ll learn the best place for an emergency fund and how to keep your business running on a financially healthy note even when hard times come knocking.
What is a business emergency fund, anyway?
Savvy business leaders know that setting money aside in case of an emergency is a wise decision. An emergency fund can keep a company afloat in bad times instead of ultimately going out of business. It can also help you pay for your business expenses if you go through a period where you can’t sell your products or services. Think of it as a safety net, and keep in mind that there are only benefits and no downsides to putting an emergency fund in place.
Try to set aside at least two months of payroll
While some business experts say one thing when it comes to determining the size of your emergency fund, others will tell you something else entirely. The average between the wildly varying opinions you’ll find online comes out to the recommendation to set aside around two months of payroll if at all possible.
The truth is, though, however much you choose to set aside is impacted by several factors that include:
- Seasonality: If your business is seasonal, you might want to put more away in your emergency fund than other types of companies. Seasonal or cyclical businesses are also volatile, with significant highs and lows in revenue. For those super-low periods, it’s wise to have a few months of expenses saved. Exceedingly cautious businesses have been known to save up to two years of expenses in advance.
- The structure of your business: The extent you choose to save can depend mainly on how well you can continue operations if your income suffers. If you’re a sole proprietorship, you might only need money to cover your own salary for a bit. However, if you have employees, their wages and other expenses will need to factor into your decisions.
- Receivables and inventory: You need to have more in reserves if you carry inventory or have receivables that tend to drag out.
Where do you find the money?
Saying that you need to have an emergency fund and how much you should put into it so that you can cover business expenses when money is tight is all well and good. However, where do you find the cash to put in that savings fund? Well, one of the first ways is by cutting expenses where you can.
Follow the Pareto Principle
This rule says that about 80% of results come from 20% of effort. In other words, focus your effort and prioritize the things that work best in your business and ignore the rest. Make more income by optimizing your time.
Outsource and partner
Cut as much overhead as possible. Any support functions that don’t absolutely need to be done in-house should be outsourced. Remember that when you outsource, you don’t have to worry about employee benefits, etc. You only pay for services when you need them, which can result in significant savings.
Stop paying for traditional advertising
By cutting out traditional advertising in favor of low-cost alternatives, you can save a ton of money. For example, instead of spending money on things like:
- Print ads
- Radio ads
- Television ads
- Ads on billboards
- Run email campaigns
- Guest post on blogs
- Run a referral campaign
- Optimize your website for search engines (SEO)
- Engage in online forums and communities
Learn the lesson of the ant and the grasshopper. The ant was diligent and saved while the harvest was plentiful against the coming harshness of winter. The grasshopper ate its fill and thought to itself, “Let the good times roll!” However, when winter came, and there was no longer any sustenance, the ant survived, and the grasshopper did not.
In light of the this, here are some further tips on where you can look to cut costs and save:
- Capital costs: Do you really need to buy that new equipment before you’ve established an emergency fund?
- Rent: If there’s been an economic downturn, think about renegotiating your lease.
- Discretionary spending: Be as efficient as possible. Don’t hire more employees than you actually need. Cut out all nonessential spending entirely.
With the recent national shutdown due to COVID-19, all kinds of businesses saw considerable losses in revenue. Many shut their doors for the last time. With the proper planning and determination, you can help ensure that your business has the resources it needs to continue operations, even if it must shut down wholly or partially in adverse circumstances.
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