Some call it emergency funds, while others call it savings. Whatever the label, setting aside enough money to fund your business and personal expenses for a few months is a good idea to help survive some rainy economic days.
Here are some tips to help create a financial safety net for you and your business.
Know your numbers
All business owners experience a cash crunch from time to time.
Keeping accurate financial records, regularly tracking expenses and keeping an eye on your cash flow will help you respond quickly when there's a shortfall. Business experts recommend setting aside emergency funds equivalent to 6 months of expenses to act as a cushion in less profitable times. If putting away that much cash feels like an impossible task, aim to save just 3 months' worth of expenses to start.
Set a reasonable time frame for reaching your goal and focus on being consistent with setting aside funds. When you've saved enough to cover 3 months of expenses, you'll have formed some good saving habits. Keep up the momentum with a challenge to save another 3 months' worth of expenses.
Calculating your business and living expenses is an excellent opportunity to review your spending patterns. See where you can cut costs and sock away a few extra dollars toward your growing emergency fund. For example, you might decide to shop around for less expensive insurance, find a less costly mobile phone plan or eliminate a poor spending habit – like buying your breakfast or lunch each day.
It's often the small, seemingly insignificant changes that can add up to big savings when you're consistent over time.
Use a business savings product
You can set up a special bank account that will pay you interest on your emergency funds, and give you anytime access to the money when you need it. Simply transfer money from your business account to the savings vehicle and watch the interest grow. It’s a smart way to keep the funds within your business instead of under your mattress.
Setting aside money is comforting – and very wise, considering most small businesses experience a cash flow crunch at some point. Explore the best savings strategy for you and your business, and rest easy knowing you are covered.
- Commit to setting aside more money in profitable times or when you come into a large chunk of money – for example, when you land an unexpected sale.
- Resist the temptation to funnel ‘extra’ cash back into your business until you've reached your savings goal.
- Look into the advantages of a Scotiabank line of credit to support your cash flow requirements.