An Emergency Fund is A Great Idea For Any Business

March 26th, 2009 by admin No CommentsNo Comments

Entrepreneur advice, an emergency fund is a great idea for any business.

Does your business have an emergency fund? Do you have money set aside in a separate account for unexpected expenses or ebbs in cash flow? Relying on a credit line, may not be enough in today’s tough economic environment. Many of my entrepreneur coaching clients and consulting associates have told me stories about banks freezing their lines, resetting terms or cutting them off completely.

There is an old saying: “Cash is King”. This definitely holds true when your business needs some lifeblood to ride out a tough time. In personal financial planning, it is recommended that individuals set aside an emergency fund of cash equal to 6 months of living expenses in case a job loss or other interruption of income occurs.

I think this is great advice not only for individuals, but for business owners as well. In my businesses, I have always felt most comfortable with 3 months of operating expenses in reserve and another month or 2 available on some sort of credit i.e.-credit lines, credit cards, etc.

One of the reasons I recommend to my small business consulting clients to maintain an emergency reserve fund of at least 3 but up to 6 months of expenses is not only to allow the business to weather any economic storm, but also to continue to pay the owners compensation while he/she rides out the tough times. If the reserves had not been set in place, and the business owner was already managing the business’s expenses aggressively, the only remaining place to cut is the owner’s compensation. It is stressful enough to manage your business on a shoestring, but adding your personal finances to the mix is a recipe for disaster. For business owners, cutting personal compensation should always be the last resort.

Since the beginning of the banking crisis last year, I occasionally tap my credit line and repay it to ensure it is there when I need it most. In addition, I keep in touch with my banker to ensure none of the terms have changed and I am constantly keeping an eye out for other possible credit avenues. In the past, I had been a loyal customer to my one bank, now a days, I regularly accept calls and respond to solicitations from other bankers, just to keep my ear to the ground in preparation for the slightest change by my lender.

In my businesses, or any business for that matter, the chances of a 100% decrease in monthly revenue is very slim. But in these economic times, it is quite possible to have a 30% or more sales dip in one or several months. It is in those months that you will be thankful that you planned ahead and put your reserves away for the slow times.

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Filed under: small business budgeting

An Emergency Fund is A Great Idea For Any Business

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