Between 2007 and 2010 the United States’ economy struggled with a recession. While there were signs of improvement in 2010 many small businesses were still playing it safe when it came to their investments and expenditures. However, despite this cautious behavior many small businesses did not take steps to protect their business from future economic problems, such as developing an emergency funds account.
What Is an Emergency Funds Account?
An emergency funds account is a cash savings account that is set up by a business. It contains money that the business can use during an emergency to cover operating expenses or emergency purchases. This fund is optional for running a business but it can mean the difference between surviving economic turmoil and having to dissolve the business.
How Much Money?
There is no set amount of money that has to be in an emergency funds account. However, it is a good idea to have at least enough money in the account to cover three months of operating expenses, and best to have enough money to cover at least six months of operating expenses. The amount of money in this account will provide an economic cushion for when your cash flow is low, when you need new equipment or supplies to fill a large order and for when the market is slow and not supporting your business.
Where Does the Money Come From?
While it is logical to say that you need to have an emergency funds account, it is quite another thing to fund one of these accounts. However, there are ways to build an emergency funds account gradually and painlessly. For example, you can deposit a percentage of your profits each month, you can deposit a set amount of money each month, or you can utilize tax refunds and other “found” money into the account.
Managing the Account
After the emergency funds account has been set up, it needs to be managed. It is important to know how much money is going into this account each month and how much is being withdrawn. A good way to keep this fund from being used for non-emergency situations you need to establish rules for using the money. For example, the money can only be used to supplement cash flow or only used for operational expenses. Before withdrawing money from this account you need to ask yourself if there is anywhere else the money can be taken from, how long it will take you to replace the money in the account and if the expense is necessary? These questions will help you to avoid spending the money on unnecessary expenditures or on things that could be funded from another account.