You Have a Personal Savings; Why Not a Business Savings?
Many of us have a rainy day fund for when (not IF) things go south. Your car needs a new transmission, your roof has a leak, a child gets ill. These things happen, and our personal emergency fund is there waiting to save us, or at least minimize the impact.
But very few business owners seem to have an emergency fund for their business. And knowing your personal emergency fund is there to bail you out if needed is not what it means to have an emergency fund for your business. Business and personal funds should always remain separate.
There’s a lot of unexpected expenses that could come up in a business, from losing a big account to needing a new HVAC system to a water leak that needs to be fixed ASAP, attorney fees to help with a disgruntled employee or former client. We hope that none of these happen, but the reality is that they can and they will at some point.
The beautiful thing about the Profit First cash flow management system is that your business will start building an emergency fund for itself if you run the system correctly.
Here’s how Profit First helps your business establish its own emergency fund:
Twice a month, you’ll transfer a percentage of revenue to your Profit bank account. (How much depends on your own profit allocation percentages.) Over time, your Profit account grows.
Then, each quarter, you’ll transfer half of the funds in the Profit account to your own personal account to do with as you wish. It’s your reward as the business owner. Use it to pay down personal debt, buy something fun, take a trip, you name it.
The other half will stay in the Profit account as an emergency fund, and you can let that fund grow. Now, when (not IF) things go south, the business has its own support.
Ideally, you’ll want to reserve three to six months for business expenses in your Profit account or another emergency account. It’s generally not a good idea to have too much cash due to liability, so once you have a fully-funded emergency fund you can use 100% of the funds in the PROFIT account.
And no matter what the size of your current emergency fund, know that every dollar will help you rest a little bit easier.
Need help getting your accounts set up or determining your distribution amount? Let’s talk!