There are many reasons why it’s important to have a rainy-day fund, or a savings account, for your business. You never know what your business may face in the future and will certainly want to have some extra cash stashed away for emergencies.
Why have a rainy-day fund?
Before we get into the tips for storing up a rainy-day fund, let’s review some of the reasons why setting one up for your business is vital for success.
1) Future tax payments
When tax season rolls around, you will need money to pay your tax liabilities. A good rule of thumb is to save 4.95% of your estimated profit to pay state income tax (in the state of Illinois) and to set aside your marginal federal tax rate times your estimated profit to pay federal income tax. Your marginal tax rate can be found here. Sole proprietors and single member LLCs will need an additional 15%, roughly, to cover Social Security and Medicare taxes.
2) Unexpected events
Life happens and that means emergencies happen. In fact, running out of cash is one of the top reasons why small businesses fail. Having money in your rainy-day fund could help you avoid this common problem. Having a rainy-day fund isn’t just necessary for unexpected events, it is needed to fuel company growth, such as buying new equipment or hiring additional employees. Plus, with a savings account, you can access money quickly if you need it on a short-term basis.
3) Getting through lulls
It is common for companies to experience lulls—whether they be seasonal or part of the economic cycle. Having access to saved cash can help your business stay running smoothly even during the inevitable lulls.
How much money should you save?
Experts agree that you should have at least three months’ worth of your monthly business expenses in readily accessible savings. This cushion will give you some peace of mind should you find your business facing any of the following, rather common, occurrences:
1) Loss of a key employee
Whether due to pregnancy, illness, death, or job change, this can deeply impact your business. Depending on your business and the position in question, it can take months to interview, hire, and train key employees. Knowing that you have enough money in savings to ride through this transitional phase will not only offer peace of mind but it will allow you the luxury of making a replacement decision in a controlled and methodical manner.
2) A sudden business opportunity comes your way
Should this happen, it is very advantageous to have access to readily available funds. Having to wait for loan approval could make the difference between the ability to capitalize on an opportunity, or your competition being able to close the deal while you are still waiting for funding.
3) A major weather event
Weather phenomena such as tornadoes, flooding, and other natural disasters can wreak havoc on your business. It takes time to rebuild, regroup, and restart. Having money in savings will allow you to begin the process of rebuilding while waiting for your insurance company to settle. It will also allow you to get a contractor in and begin the process of restoration started immediately.
Tips for Saving
1) Establish a budget
Properly functioning businesses should operate with a set budget. Understanding your monthly income and expenses will help you determine how much money you can save each month—whether that be a percentage of your business’s profit or a set amount. If you need help, the Sharp Point team can assist you in calculating these vital numbers!
2) Set up automatic savings
Set up your account to transfer money into your savings account automatically. Designated amounts move into your rainy-day fund without you having to remember to transfer the funds.
3) Go green
If your business is energy efficient, you will save money each month on your energy output and office supplies. By going paperless, you save money on supplies. By making your office energy efficient—lowering the thermostat in the winter, keeping it a little higher in the summer, and installing a programmable thermostat to adjust the temperature outside of office hours—you can save money here too. Put your green energy effort savings into your rainy-day fund!
4) Make meetings more efficient
How much money are you spending on your employees to meet every week/bi-weekly/month? Encourage them to keep meetings short and efficient to help save money—you can even consider holding a “standing meeting” to keep things brief.
In Conclusion
Establishing habits that work to help your business save money is vital for your success. You never know what life will throw at you and you will want to be prepared! If you need help creating good savings habits, the Sharp Point Bookkeeping Solutions team is ready for your call.