In order to operate a profitable small business, you have to do a lot of things right. You have to deliver great products and services, market yourself well, hire great employees and make shrewd decisions. But you also have to recognize that from time to time, things are going to go wrong. And those failures can cost you a lot of money.
In this series, we’re examining how God’s wisdom for your personal financial life also applies to your business finances. We’ve talked about the importance of watching expenses, using a budget, and planning for growth carefully — all concepts that are as applicable to our personal lives as they are to our business lives. Today’s lesson is just as important: Emergency savings are vital for individuals and families, and they can save your business from going under as well.
The idea of emergency savings is a time-tested one (it dates back to biblical times), and it’s based on the principle that stuff goes wrong in life. Stuff breaks, people get sick, expenses skyrocket and the person holding the checkbook has to find a way to pay for it all. If you live on a shoestring, unexpected expenses can wreck your financial life and put you into deep debt. If you prepare for emergencies by saving money to cover these expenses before they come up, though, you’ll find yourself protected from the junk that life throws at you.
If you’re a business owner, you already know that the law of unexpected expenses is just as applicable in business as it is in personal life. In fact, you may be even more susceptible to this phenomenon. The more equipment you operate, the more likely you are to have a breakdown or malfunction. The more employees you have, the more likely that one of them will make a costly mistake. The more customers you serve, the more likely that one of them will sue you for something.
Sometimes, big business expenses happen because we goof up. If you’ve been 100 percent successful in your business so far, that’s great, but rest assured that it won’t last. In order to grow a business, you must constantly try new things, and not all of them will be home runs. Eventually, one of your new ideas iss going to be a dud. (That doesn’t mean you’re a bad business person, by the way — it just means that you’re human) If you spent a lot of money developing this failed concept or product, you may not ever break even on it. Sometimes our own good intentions cost us money.
Finally, many businesses are highly vulnerable to financial influences from the outside world. A whole host of things can derail your business plans, and many of them are outside of your control. Poor bank policies caused the recession that we’re in right now, and those bad decisions made on Wall Street have greatly impacted Main Street businesses all over the world. Other unexpected expenses can come up too — your landlord may decide to raise your rent, or one of your vendors may decide to jack up prices on one of the key materials that your business requires. A new competitor may come onto the scene and steal some of your market share. Simply put, there’s no end to the ways that this world can cost your business money.
Plenty of things could lead your business down the path to failure, but it doesn’t have to be that way. You can protect yourself from calamity by having emergency reserves in place for your company. You can’t always foresee the challenges that will come down the road, but you can be sure that they’re coming. Emergency savings put a cash buffer between you and the storm clouds on the horizon.
In dire times, a great emergency fund can save your business from closing. When economic troubles come, the companies that are built on shaky financial foundations are the first ones to fail. Because they have no emergency savings, they have to borrow money to make payroll and stay in business. If the storms continue, that borrowing turns into bankruptcy, killing the business and often ruining the owner’s personal finances as well. On the other hand, companies that have large cash reserves can weather just about any storm, paying their employees, filling their orders and finding new ways to market themselves in any environment. A good emergency fund allows you to fight back against the economic forces that threaten your business.
So, how much emergency savings is enough for your company? The answer is going to depend a lot on your individual business, your expense model and the nature of the industry that you work in. Many financial experts recommend six months to one year’s worth of expenses (not including inventory) as a starting point. In other words, how much does it cost for you to pay your rent, compensate your staff and keep the lights on for half a year or more? That’s a good place to begin figuring your emergency needs.
If that sounds like a really big number, it is, and that’s the point. Don’t worry, you can build up to that amount of reserve savings over time. It’s going to take some discipline to get there — you may have to forego some profits or dividends for a time in order to get your emergency savings in place. It’s money well spent, though. That discipline and persistence will turn into business stability and financial peace.
If you want your business to succeed, plan for the worst of times, and build up emergency reserves to get you through them.
Photo by F33. Used under Creative Commons License.