The COVID-19 pandemic has shut down economic activities, placing nearly half of the global population under some form of a lockdown to prevent the spread of the virus. As the health and human toll continues to surge, so does the economic damage which represents the deepest recession since WWII.
We may be far from winning the battle, but we are slowly transitioning to recovering from COVID-19. If there’s one thing that the past year has demonstrated, it’s the value of having a contingency plan, including an emergency fund to help us tread the waters long enough to come out the other side.
The Benefits of Having an Emergency Fund
Even without a pandemic, most small businesses will run into cash flow issues at some point, with the most common financial challenge being paying operating expenses.
Having an emergency fund assures you that you have the right amount on hand to continue operations in lean times. It is a safety net that you can use to meet your emergency expenses without resorting to other options such as applying for high-interest loans or tapping your personal reserves.
It gives you security
Emergencies can be anything from a pandemic to natural disasters, prolonged power outages, or emergency repairs. While the nature of emergencies varies, what doesn’t is the fact that you have a resource you can tap just when you need it.
It pays your bills
Life goes on even in a pandemic. Nothing could have prepared us for the past year, but an emergency fund can help you pay your rent, electric bill, and other overhead expenses. It also guarantees that you can pay your employees who rely on their payroll, even while the operations are slow or have come to a full stop.
It keeps your savings untouched
This is one of the reasons to separate your personal and business finances. In times of an emergency, business owners are likely to deplete their personal resources to keep their business running. But, with an emergency fund available, you not only avoid tapping your savings, but you save yourself a great deal of stress as well.
You can learn more about the value of emergency funds by consulting a data analytics agency that provides financial modelling services.
How to Build an Emergency Fund
Experts have varying opinions on how much you should keep in your emergency fund. But, it’s largely dependent on factors including:
• The size and structure of your business – how will losing revenue affect your ability to continue operations?
• Operational costs – how much does it cost you to operate?
• Receivables and inventory – the more inventory you carry, the more emergency funds you need.
Consider the above factors to determine how much you will need to operate in any given situation. As the rule of thumb, three to six months of expenses is ideal and a month’s worth is the minimum.
1. Start depositing. Set a schedule for depositing funds and stick to it. Better yet, have your savings automatically deducted from your checking account and pretend it doesn’t exist.
2. Save in good times. Work hard to put aside money throughout the year, but particularly when business is doing well. It should make up for the times when revenue is on the lean side.
3. Keep your emergency fund separate. When all your money is combined, it can be hard to tell whether you have enough for an emergency. Keep a separate bank account for your emergency fund.
4. Lower your expenses. Aside from saving money, you should also look into ways to cut expenses. Review your finances—cut back where you can or shop around for better rates.
5. Consider other resources. If your emergency reserves are not enough to tide you over, you can also look at other funding options such as opening a line of credit.
6. Ask for help. Financial modelling can be overwhelming, which is where data analysts can be helpful. They can give you a better understanding of your business financial status, making sure that you are saving the right amount for the right purpose.
It can be difficult to calculate just how much you have to put away for an emergency and even more difficult to actually save that money.
Being emergency-ready can mean the difference between surviving or failing in the event of an emergency. One thing’s for sure, any circumstance where your income doesn’t meet your expenses, you are covered if you have an emergency fund in place.
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