Is Your Small Business Ready For An Emergency?
Andrew Dehan4-minute read
UPDATED: April 07, 2022
It’s no easy feat to start a small business and then keep it running. In order to prepare for the inevitable catastrophes, unexpected situations, and even business-related emergencies, you’ll want to have adequate savings on hand.
Determining how much you need in terms of emergency savings can be a bit confusing, though, especially if you’re used to thinking in terms of personal savings. However, there are a few good rules of thumb to keep in mind as you get started.
When facing a large or unexpected expense, some business owners will turn to business and personal loans or lines of credit. However, that is usually a bad idea for a number of reasons: these funding options can be costly, aren’t guaranteed, and may take days or even weeks to secure.
Instead, having a small business that is “emergency-ready” most often refers to creating a safety net in the form of dedicated savings. These funds can quickly be accessed and used if and when an unexpected — and unavoidable — situation arises.
By setting money aside in a dedicated savings account, you provide your business with both flexibility and security in a readily-accessibly form.
Types Of Business Emergencies
The situations that your business could face are endless, and depend largely on the type of business you run. However, some potential situations you could encounter include:
- Power outages – these can not only impact your ability to run your business, fulfill orders, etc. but can also damage machinery or ruin perishable items
- Medical emergencies (like an injury or serious illness), which could keep you out of work
- Natural disasters such as fires, floods, hurricanes or tornadoes
- Technology issues, like a crashed computer system or even security breach
- Legal issues, whether you’re being sued or you’re the one needing to file a lawsuit
- Unexpected loss of an employee to resignation, illness or death
- Building damage or repair, such as burst pipes or a broken A/C unit
The impact of these situations on your company will vary. Your business insurance policy may even provide coverage for some of these situations (sans a deductible). However, being prepared means that you are never in a tight situation.
Savings Are Helpful For More Than Just Emergencies
Small business savings are imperative when it comes to preparing for emergency situations. Sometimes, though, having a “just in case” nest egg set aside can allow your business to take advantage of excellent opportunities when they arise, even if they are completely unexpected.
For instance, emergency savings could allow you to purchase discounted equipment from a competitor who is suddenly going out of business. If the opportunity arises to purchase a franchise and expand, the liquidity of a healthy savings account can help make that move possible.
Or, let’s just say you get lucky and one of your products goes viral, resulting in a wave of orders. Emergency funds could allow you to purchase the supplies you need and pay the staff necessary to fulfill the invoices.
While a business emergency fund should always be on-hand for true emergencies, having savings available can also open positive doors for your company.
How Much Savings Should A Small Business Have?
From your own personal finances, you are probably already familiar with the typical advice on emergency funds. The general rule of thumb is that you should first save at least $1,000 for the unexpected, and then work to build 3 – 6 months of expenses in case something catastrophic were to occur.
Luckily, in terms of business tips, the advice on savings is about the same (just likely on a larger scale).
When it comes to how much of an emergency fund you should have, it’s common to save at least 3 months’ worth of business expenses, which can keep your company afloat if something happens. So if your business spends $15,000 each month, plan to save up around $45,000. If you spend only $4,000 a month, you’ll need to save at least $12,000.
Of course, there’s nothing to stop you from being overprepared and saving more, if you have the ability to do so and want the added peace of mind.
Just as with your personal emergency fund, it would be wise to aim for as many as 6 or 12 months’ worth of expenses in savings. With that sort of money tucked away, you could rest easy knowing your business is prepared for anything.
How prepared you want to be depends on your comfort level and saving ability, and whether you have any other safety nets in place (such as a business line of credit).
It can be difficult to calculate just how much your business needs to put away in savings. Then, actually saving that money – and resisting the temptation to touch it – is yet another challenge.
Ensuring that your small business is emergency-ready can mean the difference between surviving or failing in an unexpected situation, however. So, it’s always wise to prepare as aggressively as possible.
Setting aside enough cash today can help ensure that your small business stays ready for tomorrow… no matter what kind of emergency or opportunity may arise.
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