When you are managing your business finances and deciding where to spend your money, how much do you put aside in savings?
Failing to put money aside into an emergency savings account is one of the biggest mistakes that new business owners make.
It’s only natural that you want to invest back into the business to make it grow, but it’s so important that you have a buffer to protect you in difficult times.
These are some of the situations where your emergency savings could save your business.
Cash Flow Problems
If you’re a new business owner, you’ve probably already been warned about cash flow issues. The most common reason that new companies fold is that they don’t have enough cash to continue operating.
Sometimes, this is due to overspending, but often it’s down to factors outside of your control. There might be a dip in the market for some reason or maybe a lot of customers decide to pay their invoices late.
In this situation, your emergency funds can help you make ends meet until things get back to normal again and you start bringing in more revenue.
However, if you don’t have any emergency funds, you will be forced to rely on borrowing, which puts your business in a tricky position.
Business owners don’t think about natural disasters because they think that it will never happen to them.
But how are you going to pay for repairs or water damage restoration if a fire or a flood does happen?
If you don’t have the funds there to cover this, you won’t be able to open your business again unless you borrow a lot of money.
This means that a natural disaster could be the end of your business if you don’t have an emergency fund in place.
If your business encounters legal problems, the bill can quickly get very high. If a customer attempts to sue you or you have to negotiate an employment law case, the court proceedings can take a long time.
This will drain your funds and if you don’t have the money to pay, your legal team won’t continue to work for free.
Although you will be able to recover the funds if you win and your insurance will cover any payouts, you still need the money to cover the legal fees to start with.
If your business relies on expensive equipment, it’s vital that you have funds in place to pay for maintenance. Say, for example, you run a manufacturing business and a key piece of machinery breaks down.
Your entire business comes to a grinding halt, you are forced to let customers down, and you can’t generate any revenue.
The survival of your entire business hinges on you getting that machine fixed. If you don’t have the money to manage equipment maintenance and you are unable to borrow, this could be the end of your business for good.
There’s a reason why everybody says that your business needs an emergency fund. In these situations, it can be the difference between success and failure.