For the last few years my favorite radio program has been the Dave Ramsey show. His common sense approach to finance has helped many get out of debt and turn their lives around. One part of the Dave Ramsey plan is an emergency fund of six months or more of living expenses for a rainy day.
While Dave is applying the emergency fund to personal finance, not only do I agree with his program, I believe that any small business should also have an emergency fund.
So why should a business have an emergency fund? For the same reasons Dave Ramsey says that the average person on the street should have one, because if you don’t then Murphy will come knocking on your door.
Your emergency fund should assume that your business will be closed for six months and you would need enough money to get you through those times.
While you may not face closure, the most common problem you are going to face is construction. While you can put your head in the sand and think that construction is never going to affect your business, at some point there will be bulldozers at your front door tearing apart your street and sidewalk. If you do not have an emergency fund in place, the drop off in business will be catastrophic. How many businesses have you seen go out of business with the owner crying how construction killed him? It wasn’t the construction; it was poor financial planning.
Now if you have an emergency fund of six months of expenses, you will feel a pinch from construction but it won’t be fatal. Even if your business where to drop off by 50% or more during that period you would be able to survive a year or more on your emergency fund. Or since it has been in our mindset so much in the last year, what if your business was struck by a natural disaster and had to close for a month? Once again if you have your emergency fund in place, you will survive.
Some will argue that they can’t afford to have an emergency fund, my question to them is, how can they not afford to have an emergency fund? Your goal in business should be to make it a success and provide yourself and your family a good living. An emergency fund will guarantee that your dream will not die in case of construction or a major disaster.
For other ideas to help you financially, I suggest you listen to the Dave Ramsey show or go to his website.
*This is not a paid endorsement; I have listened to Dave for about five years, have used his ideas and a believer in his ideas and his belief in helping others.