If COVID has taught us anything, it’s this: nothing is certain. Your business could literally dry up tomorrow. Dark, I know.
Here’s the good news: you can build liquidity insurance into your business. In other words, you can do something about it and make sure your business is COVID-proof, recession-proof, whatever-proof!
With our clients, we call it The Vault, a high-interest yield savings account to “hide” money from your usual operations and set aside funds to insulate your business from the “what-ifs”.
Here’s how to get started:
- Determine a realistic target amount: Calculate 3–6 months of essential operating expenses (rent, salaries, utilities, core inventory, etc.) as a starting point. For businesses with highly volatile income, consider a larger buffer. This is your Cap — the end goal.
- Open a separate, high-yield savings account: Keep emergency funds separate from operating capital to avoid accidental spending and earn interest.
- Start small and be consistent: Even if it’s just a small percentage of monthly revenue, consistently setting aside funds is key. Automate transfers to a dedicated savings account. Most clients start at 5% of revenue.
- Utilize windfalls wisely: Direct unexpected income, bonuses, or large client payments directly into your emergency fund rather than spending it. If you can, bump your contribution to 10% or even 15% for these one-time payments.
- Set up automatic transfers: Treat your emergency fund contribution like a fixed expense. Schedule automatic transfers from your checking to your savings account to avoid rethinking the decision and spending it elsewhere.
That’s it. You are now building a Vault. Once you hit the Cap, you can stop the transfers and just let the interest grow it.
Other risk-management activities to help you cash flow in emergencies might include:
- Cushion or “Petty Cash” Accounts: A small cash cushion in your operating account helps prevent dipping into the main emergency fund for minor needs.
- Identify and cut non-essential expenses: Review your budget regularly (at least annually) for areas where you can reduce spending and reallocate those funds to your emergency savings.
- Consider a line of credit as supplemental: A pre-approved line of credit can be a backup resource, but not a substitute for liquid cash in a dedicated fund.
- Prioritize paying off high-interest debt: Reducing debt frees up future cash flow and prevents high-interest payments from draining potential emergency funds.
