Make Sure Your Business has an Umbrella for a Rainy Day
by Carrie Hinkel on March 11th, 2008
Most business owners don’t feel the need to have a “rainy day” or “emergency” fund until business is slow or an unexpected expense is incurred. Instead of having to scramble over some “fast cash” for the business, why not slowly build up a savings account that holds several months worth of operating cash? Even if your business is a start-up and you feel that every dollar is already spent before it’s earned, having a “rainy day fund” is a good idea – and you don’t need a lot of cash to start.
If money is tight, set a goal to have three months worth of expenses saved up within the next twenty-four months. That will give you time to slowly contribute to the account each month. Once your cash flow has picked up, you can then make a new goal of building your emergency account to hold another three months worth of expenses.
Having a rainy day fund is more than just a cushion ready to protect the business when disaster strikes. Think of it also as your reason to take more calculated risks. Whereas before you may have thought better of doing something “outside the box”, with a financial “just in case” backup, you have the freedom to make smart business growth choices that don’t come with a 100% guarantee. As many successful business owners will tell you, it’s the risks you take that could very well bring your business to the next level.
Yet another reason for your business to have a rainy day fund is that having a ready source of cash can help you take advantage of business opportunities you otherwise may not have been able to afford. Seasoned business owners know that not all business decisions and opportunities are months in the making. You might find your product supplier over-ordered and is selling pallet-sized shipments at a 30% discount, or maybe a large and well-known mail order catalog has selected your product for inclusion, but there is a $2,000 placement fee. The situations are endless, but unless you have a way of getting “fast cash”, you could very well miss out on opportunities that could have done wonders to skyrocket your business.
Starting your rainy day fund is easy: just take a look at your financial statements to figure out your average business expenses per month. Then, figure out how much you can reasonably contribute to the fund until it has enough to cover three to six months worth of operating expenses. If you come to the conclusion that you simply don’t have any leftover money to contribute, then look again and see what expenses you can cut out. Are you over-paying on shipping? Do you really need that fresh-from-Starbucks coffee every morning (ever hear of the latte factor?) Even if you can scrape together $25 a week, that’s better than nothing and you will find that once you start it, contributing to your rainy day fund is easier than you thought!