28 January 2021

Starting a rainy day fund for your business

Submitted by: Hennie Ferreira
Starting a rainy day fund for your business

While many entrepreneurs and business owners think it won’t happen to them, it is important to prepare for a possible financial crisis.

The COVID-19 pandemic has been an eye opener for entrepreneurs and business owners and has taught us the importance of being prepared for financial contingencies.  

Rainy days will come — in business and in life. Having emergency funds in place will help you weather the storms, and most importantly, put your mind at ease so you can focus on building your business. 

Why you need to a safety net 

A single unplanned event can leave you without enough money to pay bills and cover your payroll. Ensuring that you save during the good times adds a level of security to cover your usual income needs during the bad times.  Very often, entrepreneurs don’t think of having a savings account because their budget is tight. However, if you treat savings like a monthly expense, you can build a reserve that can help your business stay afloat in an emergency. Having savings will give you peace of mind and a sense of security. In business, there is always potential for unexpected costs. Osidon has prepared some tips to save for a rainy day. 

Establish a budget 

Understanding your monthly income and expenses will help you determine how much money you can save each month. Create a monthly business budget and make sure stick to it. This is the best way to start saving for your emergency fund. Make sure you look for ways to cut costs and reduce spending so that savings can be applied toward the fund. Look for ways to reduce your debt and ensure you're getting all the tax deductions you're eligible for. Furthermore, cut down on unnecessary expenses. Regularly reviewing your budget and making necessary adjustments can help you get rid of bad financial habits. 

Determine how much to set aside 

One of the first steps in the process of setting up a rainy day fund for your business is deciding how much money you would need. This will depend on several factors, including your business expenses, the size of the business and the industry you operate in.  The general rule of thumb is to have enough money saved to cover three months of expenses. If you require additional lifelines, as a last resort, look at business lines of credit. Be careful - credit comes with debt which can be difficult to pay off. 

Start small  

Set short, realistic goals and remain steadfast. Look for ways to save more. Be frugal and stay away from risky deals until you have reached your emergency fund goal. 

Rely on sound financial data 

Remember that solid small business financial management relies on sound data analysis. If you’ve been operating long enough to have a record of past expenditures and cash flow, use that information to help determine your future cash reserve requirements.  If you are unsure about your business’ financials, hire a qualified and reliable accountant to ensure you have a clear picture of where you are at all times. 

Set up a separate savings account 

By setting up a separate business savings account, you can prevent raiding the emergency funds in non-essential situations. You can also set up multiple savings accounts for different categories of expenses.  If you prefer, make use of automatic savings. Set up your account to transfer money into your savings account automatically. This means designated amounts are moved to your rainy day fund without you having to remember to transfer the funds. Additionally, remember to do research to find the best financial services provider with the best interest as well as quick and easy access to the funds in an emergency. 

Tap into the fund when growth opportunities arise 

Besides helping your business through an emergency or recovering from an economic downturn, a rainy day fund can allow you to take advantage of opportunities to grow your business. Having additional funds at the ready can help you take quick action when solid opportunities for growth arise. 

Never stop growing the fund 

The more your rainy day fund grows, the more helpful it will be when you need it. When the time comes when you need significant funds, you'll be glad you made the effort to put together a sizeable savings account. Creating room in your budget for a rainy day fund may not be easy at times, but it’s a necessity that comes down to basic financial management for small business owners. Make a habit of setting aside money for unexpected expenses, so you’ll be able to handle the next financial surprise without stress.