Tips for Building a Business Emergency Fund

February 17, 2023 by First Federal Bank

emergency fundAn emergency fund for your small business is a smart investment. By having some savings on hand, you can help your company weather economic downturns, a loss of patronage, and unexpected expenses. However, it can be a bit overwhelming to set savings goals, carve out money from your company budget, and plan for all the ups and downs your business could face. Here are a few tips on how to establish and manage a helpful emergency fund for your enterprise:

Automate your savings

Take the hassle out of building your savings by automating the process. Entrepreneur contributor Shipra Singh suggests setting up an automatic transfer at the beginning of every month to siphon off your savings before your company has the chance to spend the money on other matters. If you don’t want to take a chunk out at the beginning of each month, Forbes Council advisor Aaron Spool suggests setting up an automated transfer that moves a portion of each transaction to your emergency savings fund. Either way, by making savings a priority, your business will be better prepared to handle the unexpected.  

Determine your savings goal

It’s generally recommended to have approximately six months’ worth of emergency funds saved up to keep your business afloat during hard times. According to Jody Grunden, a member of the Forbes Finance Council, you can achieve this by setting your savings goal at around 10-30% of your annualized revenue. For a more specific target, consider adding up the costs of running your operation, including payroll, utilities, rent, taxes, and the cost of inventory. As a bare minimum, The Balance Small Business editors suggest having at least one month’s worth of payroll in your fund.

Get more from your savings

Generally speaking, a standard savings account will be the right choice for your company’s emergency fund. However, if your emergency fund will be over $100,000, Certified Public Accountant Kenneth Bucci suggests choosing a money market account. Since these accounts offer higher interest yields, you may be able to make a few bucks to grow your contributions further.

Go with the flow

Many small businesses have periods of boom and bust due to seasonal demand or economic forces outside of your control. As a result, Forbes Council member Luz Urrutia suggests saving more when your company is raking in the cash, and dialing your savings down a bit when times are lean. 

While a well-funded emergency savings account may seem like an uncontroversial idea, some businesses may be hesitant to tie up cash in the bank. Before starting your emergency fund, be sure to include the rest of your company’s leadership in the conversation. Their input may help you weigh out what percentage of your company’s revenue you should save, as well as give you greater insight into your organization’s operating costs. For more advice, seek the counsel of a business consultant or financial planner.

Categories: Business Banking, Small Business

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