How to save a contingency fund
Some things you can't plan for. There's a good chance that at
some point, you'll incur a hefty bill you couldn't possibly have
foreseen. You should save a contingency budget to ensure a minor
upset doesn't become a major financial crisis. This guide explains
why it always pays to save for a rainy day.
Why you should set up a contingency fund
- If you allot a fraction of your revenue each month to be put in
reserve for when disaster strikes, you will sleep easier.
Otherwise, a supplier going bust, a key piece of equipment going
down, income falling below your projections, or a fire, flood or
pandemic could really put a major strain on your cashflow.
- You should save for big bills, too. Most businesses need to pay
VAT once a quarter, so by putting something aside each week you can
make sure there's enough money to pay it.
What you need to consider
- Work out how much you need to save: one to three months
of operational expenses is really the minimum
- Factor in debt repayments when working out your
contingency plan: you may need to set aside more than you
- Determine what figures as an emergency: in what instance
will you access your contingency fund?
- Set up a flexible savings account which yields
good interest and allows you limited access to your funds
- Keep savings in a separate account to keep
cashflow simple and ensure you don't dip into it.
Get the best interest on your savings
- If you have spare cash in your current account, chances are
it's not getting much interest. Speak to your bank to ensure
you're getting maximum returns.
- While you don't want to be too conservative in how much you put
away, you must be careful not to lock too much money
away: you may need it for day-to-day business needs, or to
initiate an expansion plan. Make sure your high-interest account
allows you access
- Determine what your monthly operational costs are and multiply
by three: this is the minimum level for your emergency
- Don't forget to put money aside for paying off debts, bills and
- Ensure you can access you fund relatively easily
- Aim to have a good level of interest on your contingency fund:
it is good sense to make your money work for you
What kinds of eventualities do I have to save and plan
Particulars will vary from business to business. You could have
problems with suppliers, with cashflow, with your building or your
equipment. Or you could be hit with a bill you just didn't
anticipate. Disaster could also strike in the form of fire or flood
or a pandemic. No matter what happens, you need to have at least
three months' worth of survival funds ready to go.
Business continuity planning: the process of
determining and planning for how a business will survive if
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