We frequently talk about emergency funds in the personal finance space. Financial experts continuously sing the praises of having at least $1,000 or more stashed away for those moments when you hit a box on the highway and have to pay $450 for a new tire and rim (or maybe that was just me?)
Although you hear about personal emergency funds, rarely do people talk about how important it is to have an emergency fund for your business.
There are three main reasons you need to start one today if you’re a self employed entrepreneur:
1. Inconsistent Income
As business owners, we have inconsistent income. There is not a nice little neat paycheck waiting for us every two weeks. Some months could be amazing while others could be a complete financial disaster. This is why it’s so important to have an emergency fund specifically for your business.
An emergency fund is the tool that will allow you to budget with variable income. So, when you have a great month, you can place any extra income in the emergency fund to cover the months that don’t go so well. I personally always worry quite a bit when my monthly income dips, mainly because I am the sole breadwinner in my family and I have two children. An emergency fund gives me peace of mind so if I have a cash flow issue, I never have to be concerned. I simply move money into my account from my emergency fund to cover my regular bills and add back to it as soon as I can.
2. Consistent Expenses
Isn’t it funny how business income constantly fluctuates but those pesky expenses and the never ending bills always seem to come right on time? If your expenses include office space, website hosting fees, and employees, you need an emergency fund to keep these expenses and your payments of them consistent even if your income isn’t.
A business is only as good as its support system. You need to be able to turn the lights on in your brick and mortar store, issue paychecks to your assistant, and pay your Internet bill so you can conduct business. An emergency fund will ensure that even if you get into a tight financial position, you have the money to cover these integral payments.
3. Issues That Need Immediate Attention
You can be the best planner in the world, but sometimes things happen that are completely out of your control. If you sell products, you might have a faulty shipment. If you sell services through your website, you could experience hosting issues that require a last minute move to a new host. There are also glitches, hacks, and many other problems that can arise during a normal month of business.
An emergency fund allows you to have the cash available to quickly take care of any major problems that might come up and squash them quickly. You never want there to be a hiccup or any downtime when it comes to your business and how you bring in an income. Let your emergency fund smooth out any bumps you might encounter in the long journey that is business ownership.
