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 cash flow.
  • 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 operating expenses is really the minimum.
  • Factor in debt repayments when working out your contingency plan: you may need to set aside more than you think.
  • 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

Checklist

  • 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 regular commitments
  • Ensure you can access your 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

FAQ

What kinds of eventualities do I have to save and plan for?
Particulars will vary from business to business. You could have problems with suppliers, with cash flow, 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.

Jargon Buster:

Business continuity planning: the process of determining and planning for how a business will survive if disaster strikes

Resources

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