Cash flow is one of the most important components for a business to manage and can take much focus and effort to get the balance right. It is understandable therefore, that planning for rainy days can be overlooked or not prioritised when managing everyday incomings and outgoings.
To understand both why you’d need a rainy day (or emergency fund) and how much you’d need in this fund, it is crucial to look at the potential risks facing your business. This will be unique to each business but potential liabilities or unexpected expenses could include: employee illness/injury, annual leave payouts, insurance excess, reaction to competitor activity, or even positive events such as unexpected growth or investment opportunities.
Defining the scope of your risks and liabilities will also be unique to your business – for example some companies have more legal liabilities than others and some have more governmental regulations to adhere to.
The important thing to understand is that crisis and unexpected costs can come out of nowhere and in all shapes and sizes. It never hurts to be as prepared for the worst as you can be.
Where will the money for the rainy day fund come from?
Once you have made your emergency/rainy day fund a priority, some regular costs and expenses will have to be reviewed to allow for this new budget item. Money saving is a challenging practice, but it is just that – a practice, and it is also a process of constant refinement of spending and review of opportunities.
Given enough thought and planning it will be possible to sculpt a manageable saving plan for your emergency fund. Working with professionals will help you to make considered choices when it comes to sourcing the best fund to suit your needs as well as where to trim your spending and how much you can manageably save.
Some key points for building a successful rainy day fund:
– Be clear on how the fund will be used
– Start as soon as you can
– Consult with your financial advisor to ensure your fund works best for your needs
– Be consistent and prioritise saving