Does Your Business Need an Emergency Fund?
After a hurricane or other natural disaster, many businesses find themselves severely compromised or crippled in the wake of its destruction. The devastating events surrounding Hurricane Sandy are a reminder of the costly impact that such disasters can have on a business and its ultimate sustainability. While it is impossible to predict when a disaster will strike, having an emergency fund can be a critical safety net in keeping your business afloat and running both during and after a storm.
Should a natural disaster or other unexpected devastation force your business to shut or slow down, access to immediate cash can help you keep going without further delay. Availability of cash also hedges against risk of submerging into an endless cycle of debt that can often stem from using credit cards for tending to immediate repairs and recovery. While emergency fund goals vary depending on each business’s income and expenses, it is typically recommended that a business put aside enough funds to cover at least four to seven months’ worth of expenses.
Set a Budget
In order to know how much you will need, you must set forth a minimum budget. This means knowing what basic expenses need to be paid and what necessities are needed for the business to run. To the best of your abilities, figure out what operational losses your business might sustain in the event that a disaster should force your business to halt. Take inventory of any equipment and supplies that you might have to replace or substitute should you be without power for a particular period of time to avoid extended disruption. Evaluate your existing operational budget and spending habits to identify potential areas that you may be able to either cut back on or eliminate. Know that you may have to pay cash for supplies, gas, temporary employees, and even for repairs. In doing these assessments, you will be able to determine how much money you need to set aside for emergency purposes, which can present a reasonable foundation for getting your emergency fund underway.
Contribute to Your Emergency Fund
Once your emergency fund is established, it is important to make regular contributions to the account and stick with the payment plan you set up for this need. Since disasters are unpredictable and can happen at any time, it is important that this fund remains active and intact to ensure adequate funds are available and ready for deployment when disaster strikes. When setting up your emergency fund, you will want to know where you can find additional funds within your business that can be saved for emergency use. Designate a percentage within your budget that can be regularly added to your emergency fund and, when possible, allocate a portion of any tax refunds or commission checks to continue regularly contributing to your emergency fund.
Keep Your Accounts Separate
As tempting at it may be, avoid taking money from your emergency fund with the notion that you will simply pay it back when the next check comes in. Should a disaster strike in the interim, borrowing from the fund could make or break the continuation of your business. To prevent yourself from dipping into this fund, keep your account completely separate from your regular business account. Among some of the types of accounts best suited for supporting emergency funds are saving accounts, online savings account, savings bonds or lockbox. If you are uncomfortable with keeping a significant amount of money in a standard savings account with a low interest rate, a money market account allowing for withdrawals at certain minimum levels or purchasing short-term certificates of deposit with three- or six-month terms on a regular basis can sometimes represent more viable options. Since many accounts today offer debit cards, opt to forgo this option if you are unsure of your willpower or, if you prefer, considering storing the card somewhere safe so you are not tempted to use it for regular spending.
It is also important to consider the accessibility to a bank for retrieving money should disaster effect banking. If the roads are not drivable or banks are without power, you may find yourself in a predicament regardless of you preparing with an emergency fund. Depending on your business’s needs, you may want to consider keeping a small cash reserve outside your bank to ensure you are able to pay for any expenses your business might immediately need if you are unable to gain bank access.
As impossible as it might be to predict disaster, especially during today’s unstable and turbulent climate, employing the above strategies for establishing an emergency fund can make all the difference when it comes to ensuring a business remains “business as usual” during times of destruction and devastation.
Leslie H. Tayne, Esq. is the founder and managing director of The Law Offices of Leslie H. Tayne P.C., a law firm dedicated to debt management, debt resolution and bankruptcy avoidance that is based in Melville, NY, White Plains, NY and Mount Kisco, NY. She can be reached at firstname.lastname@example.org.
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