There are so many things to understand along the journey of entrepreneurship—including practices, like how to save money, that will keep your business safe.
One of the safety nets you can create for your business finances is setting up an emergency fund. While it can seem challenging when you are on a tight budget or you are saving for a new table or renovations, it is essential that you set money aside and don’t touch it until you need it.
Learn How to Save Money to Prepare for Pitfalls
An emergency fund is something that acts as a buffer between you and when circumstances within your business give you lemons.
This fund should not be confused for a splurge fund. It is not the fund to dip into when you want to try out a new product or when you want to take an educational class, or when something goes on sale.
An excellent way to determine if something is an emergency is to ask yourself if the purchase is a business want or a business need. An example of a want is a CE retreat on a topic of interest to you. An example of a need is not being able to pay rent because your business may be slow. In that latter case, dipping into your emergency fund to pay rent would be completely appropriate.
If you could see into the future and plan for every eventuality and avoid any pitfall, the need for this fund would not exist. To put it simply: Having an emergency fund is necessary because none of us can predict what will happen tomorrow—and life happens to both optimists and pessimists. Whether we make lemonade with those proverbial lemons in part depends on the presence of an emergency fund.
Imagine having seven full days of appointments scheduled, which will bring in a good amount of money. You unexpectedly get a stomach virus, and you cannot work for those seven days. Your rent and other monthly expenses still need to be paid, and most importantly, you still need to pay yourself. What do you do?
You use your emergency fund for this unexpected event. Having this emergency fund allows your body, mind and soul to heal correctly without the stress of worrying about money. You return to work when you are fully healed.
In another scenario, you provide outcall massage on-site at corporations. On Monday morning, your car won’t start. Not only will you need to pay for car repairs, you will miss your massage appointments for the two days your car is in the shop. Again, this is where your emergency fund comes in.
Learn How to Budget for Savings
When it comes to an emergency fund, the first part is determining how much to save. I encourage my clients to have at least $1,000. This may not cover significant expenses, but will give them some breathing room for smaller expenses that might arise and prevent them from using high-interest credit cards to pay for these expenses.
Most financial experts will often recommend having at least three months of business expenses in your emergency fund. The bigger the safety net, the better—and if possible, I encourage my clients to have a goal of six months of expenses in their emergency fund. This may take some time, but with persistence, it will happen.
Knowing what your expenses are is the first step in determining the dollar amount of your emergency fund. I find the first step is to create a budget. Done right, it should list all your income and expenses. The most important part of the budget is living by it.
If you do not have a lot of income, it may take a few months to build up your emergency fund. That is perfectly fine, especially if you have a savings plan and keep to it. That savings plan should be incorporated into your budget. The first couple of months will be challenging, but once you get into the groove of saving and get closer to fully funding your emergency fund, it will become easier.
Learn How to Stay in Control
When you have adequately funded your emergency fund, there will be temptations to use it. You need to be able to determine, as I stated before, if this is a real emergency or just a want.
As a business owner myself, I have found myself questioning if a business purchase was really needed at the present time. I have also found that asking myself the following questions has helped me determine when to use the money.
• Is it unexpected? Something that is an emergency is something that was not expected to have happened. Things like being sick, or being the victim of a disaster, such as a flood or earthquake, are examples of things that are unexpected.
The use of an emergency fund is justified in each of these instances, and other situations like these. Annual or periodic expenses such as clients’ birthday gifts and holiday parties are not emergencies, as they are predictable in terms of when they happen. Not having the funds for these, in most cases, is an example of poor planning.
• Is it necessary? Go back to wants versus needs. A car that has broken down and is your only means of transportation to work is a need. A repair of a roof leak that has led to the growth of mold potentially affecting the health of your clients is a need. Wanting to upgrade your outdated but perfectly functioning session room is a want. You can live without wants, but you can’t live without needs.
• Is it urgent? There is a difference between needing to fix your furnace in the dead of winter and the peak of summer. While they are both needs, only one situation is urgent.
Learn How to Save Money for Peace of Mind
It might seem as though the money is sitting in a bank not doing anything, but it is buying you peace of mind and acting as an insurance policy against curveballs within your business. While it is fantastic to have an extensive social network of people who may come to your aid during a financial emergency, growing this insurance policy will give you determination and persistence to keep moving forward in your business—and knowing you can always count on yourself will allow you to sleep better at night.
About the Author:
Lozelle Mathai, MBA, CFEI, is a financial accountant with over 18 years of experience in the field of financial management and accounting. She is the owner of Healthy Bodies of Finance, a division of Closing Your Books LLC. The Body of Accounting is an accounting consultancy firm that educates massage and bodywork business owners on how to manage, maintain and understand their business finances, including how to determine the best structure for their business. Her articles for this publication include “Can I Afford to Buy That? Here’s How to Finance a CE Class, New Table or Equipment.”