Since the start of the Great Recession emergency funds for individual households have gained traction. However, there is very little talk about the need for small, and large, businesses to have some type of liquid emergency fund readily available. If you’re a small business owner, Your Small Business Needs an Emergency Fund Too!
On my drive into work the other morning I was listening to NPR . There was a story covering the financial aftermath of Hurricane Sandy. This story did not cover the subways that were flooded, or the fact that Wall street had been closed for several days. Instead it documented the financial aftermath of two bakeries that had rented a kitchen on the sixth floor of a building, well out of the flood water’s reach.
The owner of one of the bakery companies had his largest order ever, 5,000 brownies destined for Madison Square Garden. He invested a large amount of cash to cover the ingredients, workers, and a machine to cut the brownies. This order was supposed to take his business up to the next level. However, he now believes that he will lose money and is not sure how his household bills will get paid.
Here were two small businesses that were doing great and on track to grow even bigger, the types of businesses our economy needs. Now they faced the possibility of going under, and possibly losing all they have.
An Emergency Fund is There When You Need it
While it is possible that these two bakeries have insurance to help cover the loss of their freezers, the claims can take quite a while to process, especially after a large disaster like Sandy. People may need money right away to purchase ingredients, rent, inventory, or even everyday expenses.
Where do you get the money?
You can attempt to rely on whatever is left of your monthly cash flow. However, during slow times or disasters this can quickly dry up.
Credit cards can cause other types of problems. Using them for the rewards is okay, if you pay off the balance each month. In cases where you have multiple employees purchasing items for different aspects of the business they can be useful to help keep track of these expenses. However, there is the possibility of running up large amounts of debt.
Liquid cash, either in a business checking or savings account, is there for you when you need it. Many banks have special promotions and incentives available for small businesses so it’s good to shop around. This should be completely separate from your own personal emergency fund. If you’re business is struggling chances are this is the time that you yourself may need money to get by as well.
How Much Do I Need?
The answer to this question can be tricky. If your business has little or no overhead then you may not need a very big emergency fund at all. However, if you have inventory or pay rent you may want a few months of expenses set aside. This is very much like a personal emergency fund to get you through slow times or a catastrophic loss of inventory. What would you do if a delivery truck was totaled en route to a client. You would most likely receive an insurance check for the value of the goods, however what would you do while you waited for the claim to be processed? An emergency fund would allow you to replenish your inventory much sooner and minimize the impact to your cash flow.
Income Properties Are Businesses Too
Even if you don’t own a small business in the traditional sense, but you have income properties, you need an emergency fund too. Roofs leak, hot water heaters break, as landlords these are your responsibility to fix. There should be money set aside, determined by the size of building and neighborhood, to be used in maintaining the property.
Please do not mingle this money in your personal accounts, it can have a tendency to become missing. Instead open an account at a local bank or credit union where you can deposit the money you have budgeted for repairs and quickly withdraw it. The amount you need depends on different variables; your tenants, the age of the house, what type of shape the house is in.
If you have multiple properties you can keep the money in one account. However, it’s advisable not to mingle the paperwork for the properties. In this way you can determine whether or not a particular building is making you a profit or just draining your bank account.
While emergency funds for personal households are picking up traction, you rarely hear about the need for small businesses to have one. However, businesses can run into many of the same problems as households and sometimes need a rainy day fund to help ensure they are able to weather bad times.
Do you have a small business? Have you ever had an incident where you wished that you had an emergency fund for the business?
Photo Provided by: Refracted Moments™