An emergency fund is an amount of money set aside in preparation for unexpected occurrences. Emergency fundraising is a saving habit that individuals, businesses, and governments enact for sudden unforeseen incidents like:
- Natural Disasters
- Repairing and replacement of equipments
- Sudden unemployment and displacement
Just like any other entity, as a small business owner, you need to develop the habit of emergency fundraising for the rainy days. These rainy days include:
- Low sales
- Repairing and replacement of equipment
- Sudden liquidation of your company
- Legal problems
- And any other possibilities.
Emergency funds can also be used in the placement of a loan. They will save you from taking unplanned loans with high-interest rates, and keep your business from falling off balance. Check out this article by The Balance to know how much you can put aside as an emergency fund.
3 Steps for Emergency Fundraising
As a small business owner, If you haven’t developed this habit yet, you can follow the steps listed below to set up an emergency fund for your business.
1. Separate your business savings account from your personal savings account.
Recall that the emergency fund we are referring to and trying to set up is for your business’ emergency needs not your personal emergency needs.
And since it is very common and easy for small business owners to mix their business activities with their personal life, I will recommend and emphasize that you create special savings account for your business.
Create savings account for your business no matter how small the business may be. And try to not meet your personal needs from there.
2. Deliberate on a specific amount you want to set aside.
It is vital to acknowledge that, in as much as none of us pray for evil to occur, we can’t be certain of what the future holds. Thus, I will not advise you to have a specific amount of money you want to regard as an emergency fund for your business.
But if you want to walk with a target rather than walk blindly, here is an estimation for you. Consider saving up at least enough funds that can cater to the regular running of your business expenses for three to six months.
Nevertheless, I will advise that you don’t put an end to the building up of your emergency fund. Set a goal and aim to exceed it.
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3. Save a little amount of money away gradually.
The amount of money you are to be putting away here depends on your monthly or weekly income. After all expenses, decide a specific percentage of the money you want to set apart for your emergency fund account and religiously do this.
Like I said before, even though you achieve enough money that can run your business in a year or more don’t stop saving away.
Plus, you can also increase the lump sum of your emergency fund by adding every extra or unexpected extra balances to it.
For instance, if you have a specific sales target for every week or month, and you have extra sales (it happens often), after all expenses it’s best you put such money aside.
So if you happen to be short of sales the following month, you can meet up for the expenses of that month with the excess you put away in the previous month.
Where to put or save your Emergency Fund?
You need to decide the form you want your emergency fund to take and where you want to safeguard it. Your emergency fund can be in the form of cash, liquid money, or insurance policies.
Similarly, you can decide to put your emergency fund away as cash in a specific place (not advisable), in an account (preferably a savings account ), or as an investment in an insurance company.
Normally, all that matters is how safe it is from your personal needs and all possibilities; and at the same time how quickly you can access it once the need arises.
Emergency funds are lifesavers. They will save you unplanned loans with high-interest rates, and keep your business from falling off balance. It is something you can’t do without as a business as a small business. If you can, set one up as soon as possible.