Realistically speaking, your business won’t always run as smoothly as you want it to. There’ll be instances wherein you may have to deal with some financial emergencies. So even if your sales are doing well, you need to have an emergency cash reserve to cover any unexpected and unplanned costs.
In essence, a cash reserve refers to the funds you can use during emergencies. You can rely on it to pay for unanticipated expenses. Although your cash reserve will just be sitting in your bank account until your business faces an emergency, it still plays a crucial role in managing your business finances efficiently and achieving financial stability.
Thus, if you don’t have an emergency cash reserve yet, here’s how you can set one up for your business:
1. Know Your Ideal Cash Reserve Amount
In order to properly build an emergency cash reserve, it’s important to calculate how much you need for your business. Knowing that amount can help you determine the specific ways of obtaining the funds you’re looking for.
For example, if you think you need six months or more worth of cash reserves based on your long-term business goals and anticipation of emergencies, then taking out a loan can be a good option. When you get a business loan fast with Credibly or other lending institutions, you can set up an emergency fund for your company right away. You don’t need to wait for a long time before you can have enough cash available to support your enterprise even during downtime. There are many lenders and financial institution that offer business loans to help you obtain funds as cash reserves.
To figure out how much you need to set aside, take a look at your finances and identify your negotiable and non-negotiable expenses every month. These can include employee pay, vendor agreements, marketing, and many more. These costs can help you set a goal to save enough cash for emergencies and other essential purposes.
2. Create An Automatic Savings Plan
Another way of setting up an emergency cash reserve is to automate your savings by opening a separate savings account. Depending on your revenue each month, set aside a certain amount of money as cash reserves from the revenues you receive regularly. Ask the bank to automatically transfer that specific amount to the separate account to build your savings.
By doing this every month, you can increase your cash reserves quickly. Even if you’re preoccupied in handling the core competencies of your business, automating your savings can save you time and effort. You don’t need to do anything as the money will be automatically deposited to your designated account. Hence, the funds you’re able to collect can be immediately used for any unforeseen circumstances.
3. Save A Large Amount Of Money During Good Times
Generally, it’s crucial to set aside a small but recurring amount as cash reserves for your business. However, if you’re looking to build an emergency fund as quickly as possible, then saving a large amount when your business is booming can be the perfect solution.
Since you may not know when your business would experience any sort of emergency situation, then it would be best for you to prepare as early as possible. In doing so, you can keep your business afloat even if sales go down.
4. Save At Least 10% To 30% Of Your Annual Revenue In The Bank
If you want to save funds for business emergencies, keeping at least 10% to 30% of your annual revenue in the bank can be an excellent idea. While you keep cash on hand to support your day-to-day business operations, you also need to set aside a portion of your annual revenue to make sure you have some reserved funds to cover unexpected costs.
Sometimes, your cash on hand is only enough to finance your company’s day-to-day operational expenses. Hence, if you don’t keep a portion of your money in the bank, you may end up having some financial difficulties. Not only will you have an inadequate cushion for an unanticipated expense, but you may also hurt your business’ financial health in the long run.
For example, if your business experiences downtime and no revenue is coming through, you can use the cash reserves you set aside in the bank to pay your business’ recurring bills and other non-negotiable expenses. Remember: there are many reasons you need an emergency fund, and one of them is to cover your business when a financial emergency strikes. Thus, you need to be on the side of caution to protect your company’s financial situation.
Even if your business is experiencing sunshine these days, it doesn’t mean bad weather will never come. As such, you should set up an emergency cash reserve for your business to deal with unfortunate circumstances. By keeping the information above in mind, you can take advantage of several ways to build an emergency fund to serve as your umbrella on rainy business days.