Gary Saitowitz the ongoing crisis triggered by the COVID-19 pandemic that has shuttered many small businesses. Has yet again demonstrated the need for businesses to have sufficient funds to tide over emergencies. The lack of available capital is a matter of severe concern for as many as 20% of small businesses, according to https://nsba.biz. A quick look at why you should set up an emergency fund and how to decide on its size:
Top Reasons Why Your Small Business Should Have an Emergency Fund
The need for establishing an emergency fund may be obvious but surprisingly, many small businesses. Fail to do so due to the pressure on their existing cash flows. However, given the fact that every business is likely to face some kind of emergency. Entrepreneurs need to set a fund up as quickly as possible. Some of the top benefits of keeping aside emergency funds are:
Reduce risk: By using the cash reserves, the business can survive the illness of the non-availability of the owner of key employees, closure, or slowdown due to labor issues. Equipment failure, recession in the economy, lack of market demand for the product, and more. That ensures easy availability, recommends Gary Saitowitz.
No need to use savings of the owner: When you have an emergency fund, there will be no need for the owner. To bail out the business using his personal funds and compromise the lifestyle and financial security of his family.
Avoid impact on credit and late fees: With an emergency fund, the business can still service its debt repayments as well as pay the monthly credit card. Statement dues so that there is no negative impact on the credit score.
Determining the Emergency Fund Size is Important Gary SaitowitzÂ
While there are divergent views on the amount you need to keep in the emergency fund. You should decide for yourself considering your cash flow and operational costs. Typically, important considerations include the size of the inventory and account receivables as well as the structure of your business. Thinking about the consequences of stopping operations can be a good indicator of the size of the reserves you should create. Your own financial status and need for money generated by the business is also important. Because if operating your business is critical for your survival. You need to have more money in the emergency fund. Businesses that are cyclical or seasonal. May require more money to be kept in reserves to tide over the long periods. In which the business may not be generating any cash.
Conclusion
Setting up an emergency fund can be crucial to the survival of a small business in case of an unexpected downturn. Due to a variety of reasons over which the entrepreneur may not have any control. The size of the fund will depend on the operational costs and other factors; however, having too large a fund may also prevent the business from deploying enough to its growth.