If you live in California, you may have noticed the sudden, relentless downpour of much needed rain the last few days. This very welcome relief to one of our driest winters yet got us thinking. How prepared are we for a truly “rainy” day?
Let’s explore how a rainy day fund can help your business:
A rainy day fund is not a luxury, but a necessity in today’s competitive business environment. Most people view this extra pile of money sitting idle as simply an optional advantage. Most businesses, especially small business, never accumulate a rainy day fund. Either because they are struggling to just break-even or the money is used immediately to grow the business. These funds are often only created when a small business experiences a sudden budget surplus.
A surplus of capital is can be needed for many reasons. Unfortunately, you never realize it before it is already too late. Perhaps you’re hit with a large tax penalty or a massive insurance payment. A timely infusion of cash could limit the damage and stop the ugly process of accruing interest, payment plans, and collection agencies. However, it’s also a mistake to think the rainy day fund has to be for something “negative.” This cash could also be used to make the most of some great opportunities. Let’s say you see an incredible deal on a key piece of equipment, or a new vehicle for the fleet. Maybe the opportunity to expand your staff and hire a part-time employee during the busy season takes priority. In these cases you’ll surely be glad you have the extra cash to quickly make these decisions.
Struggling to make-ends meet but want to start a rainy day fund? It can be difficult to make this happen when your business runs month-to-month, but you can make changes to start the process: First and foremost, take a look at your monthly spending. What’s a “need” and what’s a “want”? Split them in to two lists and you’ll undoubtedly have a few “wants” you can get rid of. Now, do it again, but this time think of some rainy-day scenarios. Maybe an employee has an accident at work, hires an accident lawyer and a lawsuit is formed, this can be very costly if it turns out you were at fault. A few long-time customers suddenly move on – leaving your revenue a bit dry. Maybe a storm floods your office and insurance can’t cover it all… Now lay these scenarios on top of your spending list and see what else you can drop. Chances are more than a few items are worth giving up to negate the risks of a really bad “rainy day”.
If you have reached the point in your business where you are generating positive cash flow and easily paying your bills, it’s time to start preparing for a rainy day. It doesn’t have to be huge, just make sure it is appropriately sized to handle the unexpected events your business could realistically expect. Start putting in some money when you can, or better yet, create an automatic transfer to the fund. Before long, you’ll be better prepared for the unexpected.