The importance of creating an emergency fund for your business

Whether it's a natural disaster, or a man-made one, when a cashflow crisis hits, it's much easier to be prepared, than to look for options once it hits.

While you can bridge a cashflow shortage with approaches like loan financing, the truth is that interest rates remain high, which means larger repayments and stricter thresholds for loan approvals in the first place. By setting up an emergency fund, businesses can avoid having to rely on an external party for help when times get tough, while also having peace of mind that money is there in the business should trading conditions take a turn for the worse.

What is an emergency fund?

An emergency fund is there to bridge the cash gap when you have expenses to meet, but not enough revenue coming in to match those costs. Essentially, it’s a savings reserve, designed to be used whenever trading conditions become difficult.

How much should a business save?

As a general rule, your goal for setting up an emergency fund for your business should be to save between three to six months of normal operating expenses. This might seem like a lot, but with consistent saving habits, it is possible to reach this goal. For instance, you could:Set up a separate account – having a ‘ringfenced’ account just for your emergency fund prevents you from accidentally dipping into your savings. Plus, having a separate account is an easy way to keep an eye on your overall savings balance.

Automate your savings – set up an automatic daily, weekly, or even monthly transfer from your day-to-day business account into your savings account. By ‘setting and forgetting’, your savings balance will grow without you even having to think about it.

Keep it consistent – you don’t have to magically find all the money for your emergency fund in one go. Putting a smaller, defined amount aside (such as 1% to 2% of sales) is an easy way to grow your balance without putting undue strain on your main operating account.Maximise your savings – consider opting for a high-interest savings account to grow your emergency fund further.

Review your balance regularly – make sure you’re actively reviewing your savings balance to see how you’re tracking against your overall savings goal.

Keep in mind also that the three to six months savings goal is a guideline only – ultimately, you are the best judge for how much should be stored away in an emergency fund. For some businesses, particularly those with seasonal sales, high operating costs, or that operate in high-risk sectors, it might be wise to actually aim for a higher amount for your emergency fund, while businesses with relatively low operating expenses might get away with less.

Get started on your savings goal today

If your business’s emergency fund could do with a boost, or if you’d like advice on how to improve your cash position more generally, come and speak with a member of our team today.