Be Prepared: Emergency Cash Reserve Funds

Let’s face it, some things are simply out of our control. Even the best-laid plans can go awry. We learned that lesson during the COVID-19 pandemic. At any moment, pandemics, wildfires, floods, and other natural disasters can wreak havoc on a business. And the list doesn’t end there. What about a cyberattack, supply chain disruption, rioting, or the sudden illness or death of a business owner or key employee? Emergencies come in all shapes and sizes, so it’s best to plan for the unexpected. The ages-old Boy Scout motto, “Be prepared” holds true for businesses, too. Cash planning is a crucial process for any small business.

Small business owners will have fewer sleepless nights if they create an emergency reserve fund. That’s why I recommend transferring 1% of all deposits into a bank account specifically set aside in a cash reserve account. Cash reserves help businesses cover large, unexpected costs without affecting daily operations. The emergency fund can mean the difference between a couple of lean months and going out of business entirely. Transferring 1% of deposits into an emergency reserve fund has a lot of benefits.

Pay Overhead in an Emergency

Despite the emergency you may be facing, life goes on. You still need to pay overhead costs like utilities, payroll, rent, insurance, and taxes. An emergency cash reserve fund allows you to pay these bills without accruing late-payment penalties.

Cover Times of Low Cash Flow

No matter what industry you’re in, you’re bound to have high and low sales peaks during the year. Seasonal businesses are especially vulnerable because they experience low cash flow during the off-season. Thus, meeting regular expenses becomes a challenge. A cash reserve fund helps to cover expenses when sales take a dip.

Use Cash on Hand for Purchases

Cash reserves come in handy to purchase machinery, equipment, or software to streamline business operations. The return on investment might be high for these products, but you need cash on hand to make the purchase. Instead of driving up credit card debt or securing a loan, you can use the cash reserves for major purchases.

Invest in Business Growth

When an unexpected business opportunity presents itself, you can tap into a cash reserve fund to cover the initial expenses. For example, you land a big project and you need to pay upfront for materials, supplies, or personnel. Or maybe you’re ready to expand your business to meet demand. You can take cash from the reserve fund to bankroll business growth.

Protect Personal Savings

Lastly, a cash reserve fund protects your personal savings. When emergencies strike, business owners may be tempted to tap into their personal funds to keep their business solvent. This quickly depletes any personal savings and is sure to cause more sleepless nights. Transferring 1% of deposits into an emergency reserve fund ensures a sense of security and peace of mind.

Emergency Cash Reserve Funds

Small business owners can do everything right, but some things are out of their control. To retain control, despite the unexpected circumstances, I recommend having emergency funds readily available. No matter how successful an operation you run, every business can benefit from an emergency cash reserve fund. The cash position of your business lays the foundation for operations.

To learn about our cash flow advisory services or bookkeeping processes for small businesses, contact us.