6 Tips to Save 6 Months of Emergency Cash
For some of the industries beginning to regain their momentum after months of uncertainties, business is booming. But setbacks can happen to anyone, and if nothing else has been learned from the last two years, one vital lesson has been: prepare for the unexpected. While your business is hopefully flush with cash today, saving a portion in an emergency fund for an unexpected problem tomorrow can make all the difference between a setback and a crisis. Recommendations vary about how much money an emergency fund should contain, but generally 3-6 months of operating expenses is a good base estimate to ensure keeping your business afloat during emergency management. If your business is small or starting out, capital is limited, and budgeting is not your thing, consider some tips for starting an emergency fund that any entrepreneur can do:
1. Know how much you’ll need
Spend a month or two tracking all your expenses. Bookkeeping is not fun (for many), but it is important for businesses to know how much money is coming in versus going out. Keep detailed records and receipts of every transaction and reconcile your accounts carefully for a month or two to get an overall sense of how much money each month you’ll need in an emergency. If your business is seasonal, you may need to do this for several months and then forecast busy seasons against slow seasons to average the amount of monthly funds a solid emergency fund should contain.
2. Make savings a habit
Open a savings account and have a set amount automatically transferred into it every month. If the account is interest bearing, all the better. And remember, no amount is too small. No amount of money put toward your emergency fund is wasted. When beginning an emergency fund, consistency is as important as quantity, so even a slow start is better than none.
3. Continue to pay down debt
Having emergency funds is important, but it should not come at the expense of your other financial obligations. Chances are your interest payments on debt are higher than interest payments on savings, so you do not want to tie up too much money in your emergency fund or add to any high-interest debt. Continue to pay your debt down as you build your emergency savings by allocating the money from less essential financial obligations.
4. Cut costs
Your business may be small and have a limited amount of capital. Look for ways to cut costs and redirect a portion of that money toward savings. Make a list of spending priorities to ascertain what is absolutely essential and which areas of operating costs and supplies can be trimmed back. You may be able to save money by shopping around for better deals on inventory, shipping, insurance, and leased space and also by taking advantage of low- and no-cost marketing opportunities that are abound in the digital arena. Cutting costs where possible will give you not only free up a bit of money for an emergency, but will also reduce the amount you need to save in the first place.
5. Assess your books
As your business grows, the amount of cash you would need to keep it running for 3-6 months will change. Going over your books each quarter is helpful in guiding a myriad of business investments and decisions, and it can also alert you to any changes you need to make in your savings plan.
6. Save it for actual emergencies
Your emergency fund will not be of any use if it’s depleted before an actual emergency. The shutdowns and slowdowns of 2020 and 2021 illustrated to the world the importance of emergency preparedness for businesses of all sizes.
While the project of saving 3-6 months of cash may seem like a daunting goal to a small business owner on limited funds, taking small but consistent steps to build a savings while reducing overhead expenses will put that goal firmly in reach and ensure the business’s ability to weather any storm.