Building a Strong Emergency Fund for Your Business

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:

1. 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.

2. Open a separate, high-yield savings account: Keep emergency funds separate from operating capital to avoid accidental spending and earn interest.

3. 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.

4. 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 larger one-time payments.

5. Set up automatic transfers: Treat your emergency fund contribution like a fixed expense. Schedule automatic transfers from your checking to your savings account. Make it easy for yourself and keep it out of sight, out of mind. This way, you won’t be tempted to “rethink” the transfer and use the money for something else.

That’s it.  You are now building a Vault.  Once you hit the Cap, you can stop the transfers and just let the interest build up.

Other risk management activities to help you cash flow in emergencies might also include:

• Cushion or “Petty Cash” Accounts: For very immediate, smaller needs, a small cash cushion in your operating account can prevent dipping into the main emergency fund.

• 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.  Be sure you are making adjustments as needed to accommodate your operations and other changes.

• Consider a line of credit as a supplemental, not primary, emergency resource: A pre-approved line of credit can offer a backup, but it's not a substitute for liquid cash in a dedicated fund.

• Prioritize paying off high-interest debt: While building savings, also work to reduce debt, as high-interest payments can drain future emergency funds.

Building an emergency fund is just one piece of keeping your business financially healthy. If you’d like guidance on setting up The Vault or need help creating a strategy for managing your business finances, please do not hesitate to reach out to us. We’ll help you make sure you’re prepared for whatever comes next.