The last recession sent shockwaves across every industry and the biggest lesson every businessman took away from that crisis was that even the most established businesses can encounter difficult situations and emergencies out of their control.
Having said that, there are several steps a business owner can take to safeguard their business from emergencies. An emergency fund is one of them and is a fund that can keep the business in operation even in the darkest times.
While setting up an emergency fund is a smart move, many business owners find it difficult to set up and run one. Not because they don’t want to but because they don’t know where to find the extra cash to contribute to the fund.
How to Create an Emergency Fund for Your Business
Recognizing the need to have an emergency fund is the first step. The next step is to actually set up the fund and contribute to it. This involves cutting down on expenses and increasing the revenue to fund the kitty. Here are 8 steps that will help you to set up and run a business emergency fund.
1. Cut Down on Unnecessary Expenses
You can’t save what you don’t have. Therefore, the first step will be to cut down on the expenses. The first place to start is to review extraneous spending. However, there are a lot of areas to focus on. Here’s a rundown of the most common ones:
- Business trips: The term itself exudes class but it can be expensive for the business, especially if there’s nothing important to gain from the trip. If the trip is necessary, consider using technology by conducting a teleconference. This will save the business a lot of money.
In light of this, consider evaluating all business trips taken by company employees and ask whether they are exclusively important and whether the company can save on such trips. After cutting back on these expenses, you can stash the money into an emergency fund for the business.
- Outsourcing: It’s common for businesses to outsource various services. Often, these are services that the company cannot do and while they may bring more business, they also cost you a lot of money. Reevaluate these services to find out ways they can be done in-house. The savings you’ll make on outsourcing can be used to fund an emergency kitty.
Outsourcing and business trips aren’t the only expenses a business can save on. Take a look at other business expenses and look for ways you make extra savings that you can put into an emergency fund.
2. Save Your Tax Refunds
Taxes or the “necessary evil” if you will, are a mandatory expense that often leaves a bad taste in any taxpayer’s mouth. However, going through your letterbox and finding a tax refund feels like hitting the lottery.
Of course, you’d splash money on anything after winning a lottery and the same will happen with a tax refund. Nevertheless, you don’t want to go down that road. Instead, consider putting away the money in an emergency fund.
3. Save During Sunny Days
Small businesses don’t always pull in clients throughout the year, which means there are seasons where they make a lot of money and others that are just slow. It may seem difficult for such a business to set up an emergency fund, but the truth is it’s easy.
Seize the opportunity during the high-income seasons to set up an emergency fund and contribute to it. By doing this, the business can make up for the low-income seasons.
4. Create Realistic Targets
Putting away money in the form of an emergency fund is a great step toward ensuring your business doesn’t get stuck in case of a financial strain. However, that same move can prove costly to the business, especially if it operates on tight cash flow.
Therefore, you must tread with caution when putting away money for an emergency fund. Typically, you don’t want to put away too much money that will affect the business’s cash flow. In this case, you must be realistic with your emergency fund goals. The best way to go about this is to start off small and gradually increase the amount you put away every month.
5. Include Your Emergency Fund in the Business Plan
A business plan works in the same way a map does. Both provide direction. Without one, you’ll get lost or waste resources trying to achieve a certain goal. Unfortunately, many businesses don’t have a business plan and this is alarming, to say the least.
For those that have business plans, chances are they don’t factor in an emergency fund or same day cash loans taken for their business. It’s easy to dismiss this fund but including it in the business plan will ensure you stick to the emergency fund goals.
6. Isolate the Fund
There’s a reason why the fund is called an emergency fund. Mixing it with a checking account has two disadvantages. First, there’s no way of knowing how much you have as emergency funds. Second, even if you knew the exact amount, you run the risk of using the money for other expenses.
With this in mind, it’s only wise to isolate the emergency fund to avoid a mix-up. Also, you’ll know the exact amount you have in the fund not to mention keeping away the urge to use it.
7. Generate Additional Cash
You may have done everything possible to cut down on expenses but there’s no money to set up an emergency fund. If you’re in such a dilemma, consider generating extra cash. For example, increase your revenue by recruiting an extra member in the sales department.
You can also consider introducing a new product on the market to increase revenue. This way, you’ll have additional cash to help you set up an emergency fund.
8. Create a Competitive and Saving Environment
Employees need constant motivation to propel the business to new heights. Start and encourage a savings’ culture by starting a competition where the biggest saver walks away with a prize. You can also create a competitive environment to boost revenue.
Don’t forget to give away prizes to the employee who brings in the most sales. By increasing the revenues and cutting down on expenses, you’ll have enough money to set up and run an emergency fund.
No doubt setting up an emergency fund will shield your business during the rainy days. Even so, it’s important to understand your business structure and goals regarding its growth when setting up this fund.
For instance, if you intend on making major expansions in the future, consider setting aside more money in the fund. With that said, you shouldn’t have a problem when setting up an emergency fund, at least not after reading this insightful post.