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Rainy-Day Funds: How Your Small Business Can Start One

Every small business can use a rainy-day fund – but many business owners view that kind of emergency backup as a luxury they simply can’t afford.

But we want to put that myth to rest, and show you the ins and outs of an emergency fund.

Operating a small business typically means scraping to get by – at least in the first couple of years. Even if you experience a few good months for revenue, it’s normal to experience a down month here and there. And an unexpected disaster is always a possibility. However, bill collectors are excuse-agnostic, and you need to be able to pay the piper no matter what.

That’s where a rainy-day fund comes in.

A rainy-day fund is simply a store of excess money that’s used to cover operational expenses when your normal income isn’t enough to get the job done. The problem is, that money has to come from somewhere, and if there’s one thing small businesses tend to lack, it’s a lot left over cash once all the current-month’s expenses are paid.

But financial discipline and the right advice can slowly get you there. The following are some tips on how to create a cash cushion for your small business.

5 Tips for Creating a Rainy-Day Fund

  1. Know What the Fund Should Look Like: Before you do, you plan, and the plan may differ depending on what kind of small business you operate. Let’s say you’re a startup construction company with a few heavy industrial machines. A rainy-day fund to cover the costs of physical repairs or even replacement of those kinds of vehicles would be much larger than a small Internet-based business that just needs to worry about a month or two of office, hosting and other bills. While you want to have an adequate-size emergency fund, you also don’t want to put so much away that you’re ignoring expenditures that could help you grow. Save enough, but don’t save more than you might need.
  2. Save: This is the most obvious and basic to-do, but it’s also where financial discipline comes in. Like cash burning a hole in your pocket, it’s easy for the revenues from a boom month to quickly disappear – whether it’s on less-then-necessary upgrades to the office, or aggressively spending to grow. Mentally setting a predetermined metric (like saving half of all excess revenues in a month) or creating an automated savings program that does the work for you are both good ways to start saving.
  3. Cut Back on Costs: Looking for ways to cut back is a basic money-saving tip, but doing it for the purpose of creating a rainy-day fund really helps you keep perspective when deciding where to reduce expenses. Any money you can save by not being wasteful with energy or water consumption, or by negotiating better rates with vendors, is money you can sock away next month, the month after that and so on.
  4. Keep Separate Accounts: No matter how you determine what your monthly savings formula looks like, separate it from where you typically pay your business expenses so you don’t end up using it when a moment of disciplinary weakness arises. And where should you keep the money? Nothing fancy here, but opt for an interest-bearing savings account over a checking account. Every little bit helps!
  5. Get a Consultation: The business-consulting experts at McManamon & Co. can assist you with rolling all these tips together into a coherent savings strategy. We can help you determine what you need to cover with an emergency fund, how much you’ll need and what your monthly goals need to be to achieve that number.

Forget the guesswork. Don’t leave yourself unprotected from disaster or set unrealistic goals that cripple your small business’ growth trajectory. Call McManamon & Co. at 440.892.9088 or contact us online for the best advice on setting up a rainy-day fund.



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