Planning for Emergencies
An emergency fund keeps you prepared for unplanned expenses, whether they are the result of a slow sales period or an unplanned event. If possible, having an insurance policy for your business may cover your expenses and lost revenue in the event of a natural disaster, pandemic or other unexpected event, but having cash reserves can help keep your business running.
Due to the uncertainty around the coronavirus (COVID-19) pandemic, many people are facing challenging times trying to prepare their households to weather this crisis. To weather these unpredictable costs, build and maintain an emergency fund with three to six months’ worth of expenses that you can use for payroll, rent and other operational costs.
Starting your emergency fund
An easy way to start your emergency fund is to create a goal amount and set up a monthly automatic transfer to a business savings account. The goal is to contribute enough that you can meet your goal without influencing your ability to pay current expenses.
Keep a separate account
Emergency funds should be easy to access but separate from other accounts so you’re not tempted to spend the money. For many business owners, opening a new business savings account for the emergency fund is a smart solution.
Decide how much to save
To calculate how much to save, decide how long you want to be able to cover expenses (experts recommend 3 to 6 months), then multiply your monthly expenses by that number. Put at least 10–15 percent of your average monthly income into a current or savings account automatically. Note that the size of your emergency fund will probably change along with your financial situation, so it’s important to revisit your plan from time to time to make sure the amount still makes sense.
To learn more about preparing for emergencies as a business owner, look for resources from your country’s small business administration government agency.