Leading your business without having emergency funds is almost the same as working with no investment. An emergency fund keeps you protected from unexpected and unforeseen expenses you may experience at times — these expenses may be huge. Businessmen who have a huge budget for unforeseen situations, know the actual worth of emergency savings. As for most finance related issues, prior planning is a key factor that determines success and decline.
The savings allow you to survive for a few more months rather than quick down fall on the growth curve. Consider an insurance policy – rather than paying a big amount annually to an insurance company, you are actually keeping a random amount of money aside for your business that can be used in case of emergency. Moreover, this sum of money can be accessed on immediate basis, if some unfortunate situation comes up.
For business owners, various banks and financial experts suggest to keep at least one-year worth of salary in your business account. You can start with having three or four months of savings, but you never know what can happen. It is better to be prepared in advance than being under-prepared.
The Importance of Emergency Funds for a Business
Most businessmen say, ‘I won’t accept my own salary until all of my staff have been paid’. This is one of the mantras of successful businessmen. Before facing this situation, it is recommended to establish a buffer for all possible potential difficulties in the future. You cannot predict the future, no matter if you run a big company, like Samsung or sell burgers on the street. A businessman is more likely to face emergencies at different times. You can rely on a liquid emergency fund when a catastrophic situation occurs. Be ready to survive through it.
There are a few organizations that offer various businesses immediate access to funds in case of emergency. Check out FundThrough reviews for more information on online funding platform. A businessman should create a list of expenses that the emergency fund has been designated for. Make sure the list you create are considerable emergencies, such as medical coverage, paying for maintenance, legal matters, unexpected tax bills and losses as a result of fire or natural disaster. The basic purpose of an emergency fund is the prevention from increasing your debt at times or scrambling the money at the last moment. All you need is to ensure that the emergency fund is safely stowed with you when you need it.
Maintain Your Emergency Fund
It is suggested to keep your personal and business account separate; this makes it easier for you to distinguish between your funds. Cover all of your business expenses on priority basis and then transfer a comfortable amount of salary to yourself. Create another account for emergency funds. Keep your business and personal account separate from emergency account. Pay into emergency account as often as you think it is enough for you to cover the business setbacks. In case you have high expenses and huge number of man power, it is essential to keep aside an extensive amount of capital. If the number of employees and expenses are less, you can keep it low.
The Influence of Insurance Companies
In case an insurance company doesn’t approve your claim, you have no other choice except using your available emergency fund. If the insurance claim is approved, you still need to wait until number of processes for verifications and revisions are done. The process is time consuming and may affect the operations of your running business. So, why wait for so long if you can cover your immediate business expenses on your own? Better to bear it yourself from emergency fund account and hope to get reimbursed by the insurance company later.
Reasons why You Need an Emergency Fund
‘Retained earnings’ is the term used to describe emergency fund in business. This category of money enables the business to keep going with the operations in tough times. Almost 90% of businesses do not survive due to the ignorance of inevitability. Let’s discuss a few reasons for the need of emergency fund for a business.
82% percent of business fail to survive because of the lack of cash flow. This does not only mean the flow of revenue, but encompasses liquidity and timings. For instance, your invoices are not paid or paid late, and on the other side you haven’t paid the loan payments and the due date is over. This is considered as a cash flow problem. This problem increases the extra expenses as a burden over the business.
An emergency fund enables businessmen to run operations smoothly by feeding the instant funds whenever the business needs them. A common saying, ‘time is money’, is true for all businesses. You need to have extra liquid funds available on instant basis, which keeps you on the profitable side of the statistics.
Capitalize on Opportunities
Liquidity assists agility. It is extremely important to have cash in hand to capitalize business opportunities. It enables a businessman to expand the business or make investments where he thinks could be profitable. The retained earnings give the opportunity to move with the speed.
It is highly recommended to be always prepared with a fully-fledged emergency fund to avoid fall backs during lower income period. The term ‘fully-fledge’ is subjective especially for businessmen.
By building an emergency fund, a businessman feels more confident and makes better decisions for the growth of the business. It is easier to handle any unforeseen financial emergencies that may occur and continue to grow the business.