Do you have a financial umbrella for a rainy-day in your business?
We all know businesses have their ups and downs and it will give you peace of mind if you know that you can weather the difficult times because you have a financial cushion (or umbrella!) to support you.
You never know when you’re going to face an unexpected business expense - things such replacing something your business relies on (such as a computer or car), finding yourself in a legal dispute that needs a lawyer, a slow period in your sales or a cash flow squeeze. If you have an emergency reserves already in place, you can dip into it and cover the costs quickly and without stress and anxiety.
One question you might have is: how much do I need to save?
It depends on the nature of your business but a good guideline is three to six months of your business expenses. This would ideally keep you afloat if you had no revenue for a few months.
The next question you probably have is: how do I save?
Here are some tips on how to approach it:
Start with a small goal to create a habit & build it up.
Automate so it doesn’t become another thing to remember for example with a standing order to a separate bank account.
Keep it somewhere reasonably accessible i.e. not part of your business-as-usual funds but maybe not where it’s locked away for 10 years either.
Check regularly that the amount still makes sense as your business changes.
You could try:
Extracting less dividends during the good times and leave it in the company.
Take a % of your sales and put it into a different business account.
Evaluate if there any reasonable cost reductions that won’t stifle growth - you could then put the generated saving into your emergency fund.
Remember, this isn’t a goal you can reach overnight! But making a start is a huge step to the financial health of your business.
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DISCLAIMER: The information and opinions provided on this website are for general information purposes only and are not intended to constitute professional accounting or tax advice. The information in this website should not be relied on or taken as specific advice for your own circumstances. You are recommended to obtain specific & tailored advice from a professional accountant before you take any action or refrain from action.
