Emergency funds, or rainy-day funds, are spoken of freely in personal finance classes, podcasts, and by finance gurus. Yet, in all my MBA and business classes, they were hardly mentioned. I'm not overlooking classes and lectures on cash flow management and having cash in the bank. I know all businesses should be thinking about their cash flow. That’s a given, but I know that money set aside specifically for disasters is business-saving.
The concept of an emergency fund is rather simple, yet many small business owners are not doing it.
Let me explain how to size the emergency fund. Sum up your monthly operating expenses (wages, rent, etc.), then multiply that amount by the number of months desired in your fund. I’d personally recommend a three-month minimum, but you, the owner, can decide. Then, as necessary, correct the size by regularly auditing your monthly expenses.
A quick personal story on the topic: before his passing, my father-in-law owned a business that had a slow season. You could call it a seasonal cycle. He knew to budget during the plentiful months to cover the slow months. He set this money aside, then when the time came, he still paid wages and kept the doors open all year-round. Some might argue this is just good business planning. I agree, after it was a known fact! Just imagine not knowing your business cycles yet or a change in customer patterns. Maybe the city starts road construction right in front of your store; equipment breaks; or a host of other unplanned events that can be calamities for your business.
I want to get back to the point that having an emergency fund is universally sound advice. Any small business owner is one disaster away from financial pain in both their personal lives and their business without the safety net of an emergency fund.
If you don’t have one yet, I plead with you to make one. Start today. Start by adding a line-item to your business budget until your emergency fund is sized.
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