The Importance of an Emergency Fund for Your Small Business and Ways to Set Up the Same

It is not enough to have great ideas for your business. One also needs to have access to funds to get those ideas rolling. Now once you set up your business after getting your hands on the necessary funds, it is important to think of ways that will not only help you to sustain in the long run but also cushion you against the ravages of unforeseen circumstances. A severe lack of capital can cause grave damages to your business. In fact, we only need one example to corroborate the said statement. The COVID-19 pandemic has unleashed nothing but unimaginable horrors on Earth. Millions of people died battling this virus that refuses to budge, and a million more lost their means of livelihood. 

Businesses had to shut down—some for an indefinite period and some permanently. Small and local businesses had to bear the brunt of this economic devastation more than any other. However, the ones that had an emergency fund ready at their disposal could dip into their savings and continue to stay afloat. They struggled, but they survived. That is why it is crucial to plan ahead of time, especially when it comes to a business’s finances and set up an emergency fund right at the beginning. This article focuses on the need for an emergency fund and ways in which you can go about doing the same for your small business.

The Importance of Having a Rainy Day Fund for Your Business:

It might not occur to you right at the beginning when you are setting up your new business, but having some money allocated for an emergency fund can save you in the long run. We have already given you a glimpse of that at the beginning of the article. However, if you needed some more reasons about setting aside some money for a rainy day fund, here are a few points for you to chew on.

An emergency fund reduces the risks that any business has to go through. For instance, it not only cushions you against a situation akin to another pandemic or a recession but also helps you pay off your debts and other bills on time when you are running on losses. Having a reserve fund helps you stay put during grueling times.

A reserve fund also helps in mitigating financial issues in your business without having to dip into your personal savings. Most business owners that do not have an emergency fund usually go bankrupt trying to stay afloat. This is because they dip into their savings and end up losing all their money. Therefore, if you do not want to go bankrupt due to your business, set aside money for your emergency fund. The last reason to set up a rainy day fund is to avoid credit and late fee issues. Once you have enough money in your emergency fund, you shall not have to worry about incurring late fees or face credit issues. Even if your business is not doing great, you can dip into the fund and pay all your bills on time.

Now that we have spoken at length about the need for an emergency fund, let us look into the ways in which you can determine the size of your fund and how you could set up the same.

Determining the Size of the Emergency Fund and Setting Up the Same:

Different experts and cash management services have different opinions about the optimal size of an emergency fund. There are a few factors that you must consider while deciding on the amount you must keep aside for your fund. You must check if your business carries inventory or drags out receivables. In such a case, it is essential that you stash away more money in the fund. The second thing that you must pay attention to is the structure of your business. If you have more employees who are on the payroll, you might want to keep aside more money for the fund. 

You must also check how much you have in your personal account. If you have enough money in your personal account that you can manage without a paycheck for a while, you might want to consider setting aside less money. The final thing that you must look into is your business’s seasonality. If your business is seasonal or cyclical, you must consider setting aside more money in the funds because you do not function throughout the year. Therefore, you need to have something that you can fall back on.

Summing Up:

The points we laid bare in this article must be enough to motivate you to start saving up for your emergency fund. An emergency fund helps you stay prepared in the face of adversities and ensures that you do not go out of business when times are bleak. Therefore, you might as well read through these points carefully and do the needful.