Maintaining an adequate emergency savings account to keep your business going
Emergency savings set aside funds for use in the case of a financial dilemma or in the event of a devastating loss or slow period in sales. Part of a financial plan, this fund makes it possible to continue operating, to make repairs, cover losses, or recover from stolen merchandise quickly. Quill offers a selection of software titles and financial supplies to help you meet your financial goals.
Considering monthly expenses
Most experts agree a business should maintain at least three to six months’ worth of expenses in an emergency fund to help get the company through rough patches. Using a notebook or legal pad, jot down how much you spend on rent, office supplies, salaries, vendors, inventory, utilities, and other miscellaneous expenses to get a general idea of the monthly needs. If possible, gather company financials to get exact monthly numbers to make it easier to create an exact estimate. Other items to include are transportation costs, health care insurance, and any credit payments or equipment rental fees. Also, consider how much cash has been used. In your financial report, this will show up as cash received from sales and cash spent. The net from these two is the net burn or spending patterns.
If bank loans are a possibility, consider how long it would take to receive the funds from an emergency loan. For start-ups, it could take as much as two months to get the cash in hand. This should be the absolute minimum on-hand in an emergency account.
Determining emergency cash needs
Putting aside three to six months of expenses is a good rule of thumb, but sometimes more is better to ensure you have cover for emergencies. Leave out anything that gets cut from the budget in the event of a major loss, including entertainment expenses, dining out with clients and employees, nonessential office supplies, and employee or customer gifts. While these items might provide value during normal work schedules, they aren’t a necessity to keep the business operating. Events that might warrant additional cash in an emergency fund include times of recession when unemployment rates are higher or operating a company with an erratic income. Consider keeping an additional couple of months as extra padding to protect both employees and the well-being of the organization.
Choosing a savings account
There are several types of business accounts to choose from, depending on the bank your company uses. A commercial account adds credibility to your business and makes it possible to set aside interest for capital improvements or sales taxes. High-interest accounts typically require a larger minimum balance, while there are some available for small businesses that require no minimum.
Start a search from your computer and look for the best annual percentage yield (APY) at your bank or banks in the area. Read up on the required fees, such as ATM fees, that can eat through any additional savings you may build from interest. Other items to consider are customer service reputations, ease of access to the branches, benchmarks for waived fees, and FDIC insurance.
Setting aside regular savings for an emergency fund ensures your business is prepared for emergencies to help maintain your company’s long-term financial health. Consider building an adequate account to reduce the need to borrow, which leaves more money set aside for office supplies and other necessities.