Emergency Fund for Small Businesses: 6 Simple Questions to Consider
By: Shay James
Your small business is your baby. You’ve poured months, if not years, of work, sweat, and tears into it and your profits are increasing. Then, out of nowhere, the world shuts down and you’re left scrambling to keep your business afloat.
If you never want to be in this situation of uncertainty again, you need an emergency fund for your small business.
Why is an Emergency Fund for Small Businesses Necessary?
If 2020 taught us anything, it's that you can never be too prepared. Who would have guessed that companies would be shut down for months without an ability to earn any income whatsoever?
Global shutdowns aside, there are many, more common, reasons to have an emergency fund that can support your creative agency amid a crisis. The following are prime examples of crises which warrant your preparedness:
If your business is hit with an unforeseen expense, you need cash reserves available to keep you afloat. You work tirelessly to make your small business a reality, don’t let it fall to pieces because you don’t have a contingency plan.
How Much Cash Reserves Does Your Business Need?
Just as a budget is different for every business, so is an emergency fund. You’ll have to review your company's income and expenses and come up with a plan specific to your needs. How much money do you need to keep your doors open? Can you cut certain expenses, if it becomes necessary? What monthly expenses remain if you cut all the fluff from your budget?
It’s recommended to keep at least 10%-30% of your annual revenue on hand at any given time. This savings will equate to roughly three to six months' expenses. Some businesses choose an even larger cushion and might save for 12 months of expenses. This is an individual decision and can change based on your revenue.
6 Questions to Consider When Creating an Emergency Fund
As with all important business decisions, there are a few things to consider to individualize the process for your creative agency. Keeping an emergency fund should be viewed as a standard part of doing business and shouldn't be overlooked. Use these points to guide your setup process.
1. Does My Business Have a Budget?
The first thing you need to have in place for your business is a budget. With a fine-tuned budget you can plan for both expected and unexpected expenses. This will keep your business nimble.
Your emergency fund will be there to save the day when you encounter an expense for which planning was not a possibility.
Pro-tip Review your budget at the end of every month to assess where you could have saved more money and make that accommodation next month. You may be shocked at the opportunities to increase savings!
2. Can My Business Pivot to Recoup Losses?
If you’re currently selling to one market that evaporates, can you quickly adapt your business model to accommodate the change? Think about your niche and the specialty of your work. If it will only take you three months to create a new product or service, you might not have to save six months' worth of income.
3. Should I Get Out of Debt or Save First?
Growing a creative agency takes a lot of money. Often, people choose to go into debt to finance start-up costs. If you have business debt, is it more prudent to save for an emergency fund or first pay off the debt?
Ultimately, you don’t want to increase your debt to create an emergency fund. We advise that you simultaneously save for your emergency fund AND pay off your debt.
How much you put toward each depends on how aggressive you want to be. You should always make at least the minimum payment on your debts and then save the remaining money. This will look different depending on your revenue.
Achieving this goal will take time. Keep in mind that any savings will compound into the safety net your business needs.
4. Am I Prepared for Both Feast and Famine?
One exciting thing about owning your own business is the seasons of fruitful income! These are the times when cash flow is abundant and you get to splurge on those coveted comfort-back swivel chairs.
However, pause for a second to consider whether this may instead be the perfect time to boost your savings. When your cash flow is strong, increasing your savings may prevent you from having to scramble when cash flow is scarce.
5. Are My Savings Automated?
Just as you automate bill payments, it's easy to automate your savings! With every invoice that comes in, you can schedule a certain percentage to move directly into your emergency fund account. This way you don’t even have to think about it as income! And it's another way your business becomes more streamlined.
6. What Kind of Account Should I Use?
A regular business checking account is great for day-to-day expenses. But with an emergency fund, you're stockpiling cash, so a money market account or a high-yield savings account may make more sense financially.
These accounts allow you to gain interest, while remaining very liquid, making your efforts more productive.
Enjoy the Freedom of a Fully-Funded Emergency Fund
With a fully-funded emergency fund in place, you have more freedom. You’re free from the stress of an emergency taking out your small business. You’re free from the worry of not getting paid next month because you know you have cash reserves to sustain you through tough times.
You are also free to grow your business in unexpected ways.
When your financial situation is secure, you have the freedom to jump at incredible business opportunities. Imagine you come across a course where you can build new skills to help grow your agency, or you want your independent contractors to become employees, or there’s a sale on the technical equipment of your dreams. When you’re fully funded, you can take advantage of these opportunities without fear of financial ruin.
Having the financial basics covered can help you not only survive, but thrive.
Partner With Lamplight Advisors To Streamline Your Emergency Fund Plan
The details of a proper savings plan can be overwhelming, but it doesn’t have to be. At Lamplight Advisors, we are here to comb through your business's income and expenses to help you create the plan perfect financial plan for your creative agency.
There is no reason to take on such an important decision alone! When an emergency does happen, you won’t have to scramble because you will have the funds in place. To see how we can be a partner in your business planning venture, click here to schedule a conversation.