Pump Up Your Rainy Day Fund
 By Amanda C. Garrett

Vehicles break down. Computers crash. Customers take a hike to competitors.

Small-business owners never know what a new day has in store. That’s why it’s critical to have a stash of emergency cash.

Without a financial cushion, emergencies can cripple your cash flow. Or they can cause you to max out your credit cards to cover the problem. Or they can send you running to the bank, desperate for a short-term loan.

How much should your business set aside for A rainy day? That depends on a number of factors:

• The stability of your business

• The amount of money you need to operate each month

• The amount of debt your business has incurred

• The competitive nature of your industry

• Your ability (or lack of) to accurately forecast your cash flow and expenses

But, no matter how much money you want or need to stash away, there are steps you can take to build up your emergency fund. Here are some recommendations from the New Jersey Society of Certified Public Accountants.

Define Emergency
Before you begin saving, decide what will be considered an emergency for your small business. This definition will help you determine when you can – and can’t – dip into your emergency fund.

For instance, the loss of a major client might be considered an emergency. A natural disaster that impacts your business would certainly qualify as a crisis.

But, paying a tax bill and paying for maintenance on your business vehicle aren’t emergencies. You should budget for those and similar expenses. After all, if you can see it coming, it’s usually not an emergency.

By defining emergencies in advance, you’ll be less likely to use the money for non-emergencies.

Set A Goal
Decide how much money you want to eventually have in your emergency savings. Then set small goals that will help you reach your final savings target.

For example, maybe you want to have $5,000 in your emergency fund. Begin by aiming to save $100 or $500 or some specific amount by a certain date. After you accomplish that goal, set a new one.

Save Today
Take some amount of money and put it in savings today. Even a small amount will do. Something is better than nothing.

Start Small
Determine how much you can put aside regularly for emergency savings. Look at your business budget. Choose a manageable amount that you can save on a regular basis.

Save Regularly
Set up a savings schedule. Maybe you can make deposits to your emergency fund weekly or monthly. Perhaps it’s easier for you to save $50 a week than to it is to part with $200 on a monthly basis.

Develop a regular savings schedule that will work best for you and your business.

Open An Account
Open a separate account for your emergency savings. The account should be easy to access if a crisis occurs.

A separate account will keep your emergency cash from mingling with your operating money in your checking account. A separate account will also make it easy for you to see your emergency fund as it increases – always a good motivator to keep saving.

Look into an interest-paying money market account at your bank. The money is safe, federally insured, and you can get to it quickly.

Don’t tie up your emergency cash in a risky investment trying to earn more interest, says Anthony F. Bruce, a certified public accountant in Cherry Hill, N.J. “This is where you want to be a turtle and not a rabbit,” Bruce says. “Put your emergency fund in a federally-insured account that is completely secure.”

(Posted January 2008)

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