If your business is doing well, the idea of finding thousands to put aside in the case of an emergency might seem like an unneeded burden.
But this is precisely the time to do it. If you put measures in place to protect your business during the good times, you can ride the wave of the bad times.
Likewise, if you have just launched a business you may be tempted to pour all of your funds straight in to ensure you start out strong.
But what will you do when you face your first financial problem? The sad fact is most new businesses fail within a year, this is partly due to running out of funds.
With this in mind, here are 8 common reasons to set up a business emergency fund today.
- A Buffer for Slow Payers and Backup for Non-Payers
The truth is not everyone is reliable in business and there will be times when clients, customers, and other business partners owe you money for delivered services or products and have missed the due date.
It’s not wise to assume that this money will arrive. Of course, in most cases it will, but how will your cash-flow be affected in the meantime? In the worst case scenario, what will you do if they completely fail to pay?
Your emergency fund can act as both a buffer for slow payers and a backup for non-payers. If you cannot account for this disruption, the knock-on effect can bring your entire business down.
As the second wall of defence, you should also make sure you have access to emergency loans.
Efficient businesses will have a good idea, month to month, what their cash will be spent on. However, there are always times when something different catches your eye. Perhaps a supplier has a sale or bulk discount, there’s a fire sale you can take advantage of, or you’ve found some new tech to improve an aspect of your business immediately.
Your emergency fund gives you the freedom to make these one-off up-front purchases, which can potentially help you save money in the long run.
- On the Fly Decisions
As well as upfront purchases, there are other decisions you might make on the fly that require funds. Does somebody deserve a bonus, do you want to increase output this month, what about dining a client or taking part in a trade event?
- Unexpected Expenses and Emergencies
The key reason for a business emergency fund is, you guessed it, emergencies. The form these will take can vary, but whether your office catches fire or your computer network gets hacked, you will certainly need money to get things back on track.
- Temporary Drops in Revenue
All businesses experience slow times. For some, this is more obvious, such as seasonal businesses. For everyone else, the market can change because of all sorts of different factors. The trick is to have enough money in the pot when business is down, so you can take advantage when business picks back up again.
This is even more important if you pay yourself a salary from your business or are a sole trader/ freelancer, where the majority of revenue goes straight into your personal income.
- Hiring New People
Whether you need new permanent staff or have jobs to contract out to freelancers, there needs to be money to pay them. The revenue they generate may not make itself known until much later.
You don’t want to limit the expansion of your business in this way because you can’t afford to pay more people upfront.
- If you become Sick
If you run a small business or otherwise remain an integral part of its day to day operations, what contingency plans do you have in place if you become sick for an extended period of time? At the very least you need money to pay others to pick up the slack. If the situation is particularly bad you will also need money to cover losses caused by your absence.
- Legal Costs
Unfortunately, there are all kinds of legal costs associated with running a business, from drawing up contracts to getting sued or even filing a lawsuit yourself. Sadly, the cost of legal proceedings can easily become overwhelming and result in bankruptcy. An adequate emergency fund can protect you against this.
The exact hurdles you face will depend on your business and individual circumstances, but the fact remains, if you want to be in business 10 years from now, you need to have emergency backup funds to keep things running smoothly.