4 Reasons you need an Emergency Fund for your Small Business or Nonprofit
One of the first things I do when I start working with a small business or a nonprofit is tell them they need to establish a reserve or emergency fund. I think this should be done before they start to pay off debt, plan for an expansion or whatever else they have their sights on. Why?
Here are 4 reasons I believe every small business or nonprofit needs an emergency fund:
- The bad days will come. You will run out of money. Do you want to be prepared or caught off guard? Every small business owner tends to be more optimistic than reality dictates. I see excited new owners show me projections of how much they will make the in the first year, six months, or month. They almost always overshoot and think they will make more than they do. Now don’t get me wrong, I want them to prove me wrong. I want them to wildly exceed what they projected but the truth is most of us are very optimistic and wear rose colored glasses in that first year. Experience teaches you that reality is harsh and you need to plan not only for the best but also for the worst so you aren’t panicking. Emergency funds are simply a plan for a bad day.
- You will make better decisions when you are not worried about money. Like I said in the first point, you will run out of money. Why worry about money if you don’t have to? No one wants to wake up in a cold sweat in the middle of the night wondering how they are going to pay their staff or make the bills for the month. An emergency fund gives you the ability to focus on abundance and not on lack. Living in abundance is a much better place to be than coming from scarcity. I talk all about abundant living here.
- Unexpected expenses equals you need an emergency fund. Need I say more? Life will throw things at you that you are not expecting. Running a small business or nonprofit just makes that even more inevitable. You will have things come up that you were not expecting. It is so much better to have the funds to cover those unexpected expenses.
- You can borrow from yourself instead of depending on credit. Having an emergency fund allows you the cash flow you need when you need it. You can borrow from yourself as long as you replenish it. Why pay a bank or credit card company interest when you can use your own cash to handle those unexpected expenses or cash flow issues.
Rainy days and emergency funds
I can’t impress on you enough that you need to be prepared. Small businesses and Nonprofits suffer from the same struggles with cash flow. It isn’t a matter of if it will happen but when. With a little preparation you can put back the money you need when things are going good for the days when things aren’t so good.
So many bad decisions in small businesses are made when we are scared and worried about money. Take that issue out of the mix. I can’t say you will never worry about money but it sure is easier knowing that you have funds to cover things that come up.
This really hit home with my clients during the pandemic. When the government forces you to close your business even for a short period of time you really start stressing about how you are going to pay the bills if you can’t make revenue during that time. Those that had emergency funds were ready. It didn’t take all the worry away but that was once less thing they had to be concerned about during a trying time.
Start small. Put as much back as you can when you have extra funds. You won’t miss it and your little nest egg will do nothing but grow.