With the economy as volatile as it is, it is critical that small businesses hedge against sales and profit downturns. Failure to do so can lead to myriad problems or even the ultimate failure of a business. One of the best ways to ensure that your small business is able to run smoothly, even during times of low or non-existent profit, is to build an emergency fund. These tips have been compiled by Savings.co.uk. Visit them if you would like to read more about saving money.
Emergency funds are business savings accounts that can cover regular expenses for several months or deal with large and unexpected expenses. Most business planners recommend an emergency fund cover a bare minimum of three months of operating costs, including rent, payroll, taxes, supplies, and any other regular bills. With the recent economic downturn, many experts are now recommending emergency funds cover nine months to a year if possible. An emergency fund should not be created in lieu of a savings account; it should be created specifically to deal with unexpected costs or times cash flow does not cover regular expenses. Many experts recommend that businesses set up an emergency fund first and then begin to build up their savings.
Business Solutions|Replace Lost Income
Even beyond poor sales or cash flow months, emergency funds are important to small businesses because they can temporarily replace income from customers that are late in paying. Even organizations that are not being directly hit by the economy can run into problems that they cannot easily cover without some sort of savings account. Many companies have a few large clients that make up the majority of their income. If those clients go out of business or stop being able to pay on time, it can create havoc for companies that do not have an emergency fund.
Business Solutions|Natural Disasters
Another reason that an otherwise lucrative business could need money from an emergency fund is if there is a natural disaster or a supplier is no longer able to provide needed products or tools. For example, in the aftermath of Hurricane Katrina, businesses in Louisiana had to wait for months for roads and supply lines to be restored. Additionally, business in the New Orleans area that supplied products for companies in other states was no longer able to do so for an extended period. A company’s ability to survive in these instances is usually determined by how long they are able to keep up with their bills before defaulting.
Small Business|Unexpected Expenses
Further, there are very few companies that do not run into unexpected repairs or costs at some point. This could be anything from costly equipment repairs to the expense of having computer technicians resolve an office networking issue. All companies require the use of some sort of equipment, be it computer or machinery. Breakdowns are expensive and can lead to downtime that represents lost profit. Further, since large machinery repairs or replacement can cost thousands of dollars, it is not likely that most companies will have this type of money on hand.
Finally, having an emergency fund can help small business owners make smart choices. If a particular piece of equipment is constantly