Small Businesses Need an Emergency Fund

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Due to COVID-19 and the once-in-a-lifetime restrictive measures being taken by government authorities (national, state and local) in an attempt to slow the transmission of the virus, many businesses will not survive to see the other side when the business environment gets back to providing customers with the products and services they want and need.

The undeniable situation is that most businesses cannot continue operations when they are not allowed to be “open for business” to serve the needs of the consumer.

As small business owner for over three decades, I realized how vulnerable my business was to a downturn in business when compared to the large multi-national corporations. As such, I realized that I needed a “business emergency fund” just like a family needs an emergency fund for unexpected large expenses or a loss of income.

What exactly is a business emergency fund?

Emergency funds, also known as “rainy day” funds, are cash supplies kept on hand so a business can keep operating in lean times or in the event of an emergency. Not only do these funds enable companies to keep providing services while paying their employees and suppliers, but they can also allow owners to continue supporting their families.

What are the basic components of a business emergency fund?

Accidents and disasters happen … and they can happen at any time without any advance notice. While we cannot predict what or when an emergency may occur, we can be prepared by taking steps necessary so the business can continue operations. To make sure this will happen, we need to plan based on the “worst case” scenario.

The first step in establishing a business emergency fund is to analyze your business so you can properly determine how much money is needed for your specific business emergency plan and over what period of time. Some things to consider are:

  • What expenses will be necessary to continue business operations?
  • Will you need to retain current employees? Will you need fewer employees during a time of emergency operations? Will you need more employees?
  • What additional expenses will there be?
  • How and where will you serve your existing and new customers? How will you communicate with existing and potential customers?
  • If the business emergency requires you to secure or build a new location, will the new location be suitable for the growth of the business? Will the new location serve the convenience needs of your customers?

Your business expenses will not cease simply because you are in the grips of a business emergency. You need money. Under many business emergencies, it will be a period of time before you are able to be operational again. For most businesses there are three ways of meeting your financial obligations during the business emergency period:

  1. Insurance if the cause of the emergency is insured under your business policy.
  2. A business loan may be available.
  3. You have a business emergency fund set aside and ready to use.

Ways to fund your Business Emergency Fund

Okay, you are convinced that you need to start a business emergency fund. That was easy. Now you have to find ways to fund it. That’s not so easy for many small businesses. Let’s look at a few ideas:

  • Look for ways to cut expenses. Are you spending money for something that is failing to give the expected rate of return you expected?
  • If you have a large order or sale, set a portion of the profit earned from that large order towards your business emergency fund.
  • Do you have any assets you are not using? If yes, consider selling it. Examples may include a vehicle or a building.
  • Can you add a product line or offer an additional service to generate additional income?

Choose the right type of account

As the name indicates, the money in a business emergency fund needs to be liquid so you have access to it immediately when the need arises. Your money also needs to be safe. Hence, short-term CDs, savings accounts or money market accounts are best suited for “holding” your business emergency fund.

The economic turmoil we are going through right now clearly illustrates why it could be a disaster to place your emergency fund in stocks or stock mutual funds. The last thing you want to do in a financial environment similar to what exists today is to redeem your stocks or shares in a mutual fund when the market is tanking. That’s a guaranteed loss of money.

Final Thoughts

I owned a small business for 32 years and sold it 2012 to retire. I had a business emergency fund that was adequate to continue business operations for 10 months based on the expenses of the business at the time of an emergency. The amount of money needed was reviewed annually to make sure the emergency fund was adequately funded.

I was fortunate in that I was able to fully fund my business emergency fund over a 3-month period due to a large one-time sale. I used a money market fund with check writing privileges for my funding vehicle.

I was lucky in that I only had to “tap” funds from this account once and I was able to replace the money withdrawn within 6 months. Had I not had this money available, I would have been in serious financial trouble.

Published by W. M. Brown

I am a retired U.S. expat living in Ecuador. I was a business owner for 32 years before retiring in 2012.

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