Why Small Businesses Should Save Up For A Rainy Day
“Save it for a rainy day” is a phrase we all heard growing up.
It is likely something that many of us have put into action, whether it be to save up for our retirement or just to raise some cash to cover emergency expenses.
When it comes to running a small business, putting some money aside for a rainy day can be incredibly important. In this article, we’ll cover why saving is so important to small business owners, what to do before you save, and what to do when you don’t have savings but need quick access to cash.
As a small business owner, you likely spend at least some of your time worrying about income volatility. Volatility can affect almost any company. Whether you work in a seasonal business that has high profits at certain times and very little income at other times, or running a business based on trends that can go away as quickly as they emerged.
Even companies operating in more established sectors can experience serious income volatility when national or global factors such as recessions set in.
When you save during the good times, you get some security to meet your usual income needs during the bad times. The Money Advice Service recommends that you keep the expenses for at least three months in one instant access account that gives you time when you need it.
When applying this to your business, you need to consider not only costs to you and the salaries of your employees, but costs like office rent and software subscriptions as well.
Rising & unexpected costs
Just like in our daily lives, businesses face potential unexpected costs. These costs can come as a nasty surprise and tend to show up at the worst possible moment.
Although certain types of insurance can protect you against some expected, unexpected costs, such as public liability insurance; It is also a good idea to save a ton of money in your small business to pay for costs that may not be predictable.
As a company, you are not always able to immediately increase the price of your product or service. So if your supplier costs rise unexpectedly, you could be stuck with a shortfall for some time. A savings pot is an intelligent protection against rising costs in your branch.
Before you save
Saving is always a good idea, but before doing so it may be worth paying off any debts first.
The reason for this is the relative value of the savings interest compared to the cost of most debt. For example, if you save £ 1000 in a generous savings account, you can earn an interest gain of 2%. But £ 1000 debt could easily cost you 20% + interest. By paying off the £ 1000 debt, you are effectively saving yourself 20% + instead of paying the smaller 2% interest.
Make sure you pay off any costly bank loans, credit cards, or payday loans before you save any money.
What if I don’t have any savings?
Sometimes multiple unforeseen costs can occur at the same time so you don’t have enough to pay the full amount. Or there may be unforeseen costs before you could build a savings pot in your small business.
In these cases there are a few ways to protect yourself financially. A credit card is an option for borrowing if it can cover these costs. However, due to the often immediate nature of unexpected expenses, processing a bank loan can be too slow.
A faster alternative could be arrange a loan in the short term; for example a payday loan. This can be a good option if you know you can get the cost off quickly and meet the lender’s interest rate requirements.
Saving a pot of cash is a great way to protect your business against fluctuations in income and unexpected costs. While building up costs for three months can seem like a mammoth task, a slow, steady, and consistent approach to saving will help you build a healthy buffer in case you need it.