Written by Drew Adams

Emergency Fund? You may have heard the term before, but only in personal finance. An emergency fund keeps you afloat if you break your leg or lose your job. While that is correct, what about your small business? Does that need its own emergency fund? The short answer is yes! A small business emergency fund helps your business take on uncertainty with confidence. You can rest easier knowing that you have money in place to help the business succeed even when times are tough or the unexpected happens. So what is a small business emergency fund?

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What is a Small Business Emergency Fund?

Quite simply, a business emergency fund is there for you when you need it. What does that mean? It means that when uncertain times arrive, or you run into unexpected expenses, your business is prepared to ride out the bumpy road. Emergency funds are a liquid “pile of cash” (my favorite money term). As we all know, 2020 had its fair share of unknowns. Giving your business an emergency fund to get through the uncertainty is not only a wise business move, but it will give you peace of mind as well!

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Why Does My Small Business Need an Emergency Fund?

Besides the simple answers I’ve already mentioned (a safety net & peace of mind), there are more specifics. Why does your small business need an emergency fund? Usually, for business owners, the logic is that you should take out another line of credit or raise more funding when cash is needed. But when it’s time to pay the loan back, are the tough times over? That’s the thing with uncertainty: you don’t know! That’s why a cash (or fairly liquid) emergency fund is HUGE for a small business. The ability to smooth out the bumpy road ahead (whether it’s due to a lack of consistent revenue or a global pandemic) with cash minimizes disruptions to your business. It gives you time to adjust to the current situation and make the necessary changes to propel your business out of the dark spot. Then, when times are good again, you won’t be in debt and have a deeper hole to dig out of.

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So How Much Do I Put Into This Emergency Fund?

There is no amount too small to have in your emergency fund. Anything that you can put away for an emergency is a great start! The goal (not initial requirement) should be to save about six months of business expenses in your emergency fund. You can find this target number by adding up all your monthly payroll, subscriptions, rent, etc.

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Here Are Some Ways to Reach That Goal Amount:

1. Start small!

Even a small amount of savings every month counts! Start building momentum right away. You can always increase that savings amount. Something is better than nothing!

2. Pay off debt and save for emergencies together!

You may be saying “Drew, the business has debt that it owes! I can’t save cash for an emergency!” Listen, I get it! Paying off business debts is very important. So important, in fact, that it should be the first priority. But you should split that priority with saving for an emergency. Focusing a larger percentage of your profits towards debts and a smaller percentage towards preparing for an emergency will help your business get on the right foot in no time.

So where do you start with your small business emergency fund? Start by calculating your goal amount to have in the fund. Remember, 6 months of business expenses should be the ultimate goal, but set a goal that is attainable for your business. Then, make a plan to get there. You want to get to the goal amount as soon as possible for your business. Do not sacrifice paying yourself, or potential investment opportunities that you know are solid. Make the plan realistic, but also make it a time bound goal to ensure you keep going. Lastly, keep up the savings! This will take discipline! A lot of hard work is required to get to your goals, but if it wasn’t worth it, I wouldn’t be recommending it! Your business is worth it, and I look forward to seeing your business crush it in the years ahead!