Because of the COVID-19 pandemic, most are now convinced that they need to build a rainy day fund to keep them protected and secure, especially when the unexpected happens again. Besides having a rainy day fund for yourself, it’s also essential to have one for your business as well.
Setting aside extra money or a rainy day fund for your business could be a lifesaver. This is because you’ll have available cash just in case you need to deal with nasty surprises, such as a large, unexpected bill, change in the market, late payments, and more.
The context of rainy day funds is quite simple; however, many are still unsure about how big of a financial safety net you should have. Ideally, like a personal sinking fund, you must save up at least three months of operating expenses. However, keep in mind that every business will be different and that your sinking fund amount should fit yours adequately.
For this reason, it’s best to work with reliable and cheap tax return accountants in London so that you can understand your business’s current financial health. This way, you’ll be able to gauge how many rainy day funds you need to set aside and if it will work for your business.
Now that you know how much you should have for your business’s cash cushion, here’s a simple guide on how you can build it:
Step 1: Decide How Much Cash Cushion You’ll Save and Consult Your Business Objectives
As mentioned earlier, to know how many rainy day funds you need to save, consider saving at least three months of your business’s operating expenses. Depending on how much you spend monthly, you can even go for six months worth of rainy day funds.
Once you’ve decided how much your cash cushion goal is, it’s time to consult your business objectives. For example, if your business is seasonal, your emergency funds may be different for low seasons, but you need to ensure it covers high seasons, too.
Whatever your business may be, the credible and cheap business accountant will get to advise you on the ideal cash reserve that’s best for your business type.
Step 2: Review All Your Expenses
Now that you have your rainy day goal fund down and understand your business’s objectives, you should review all of your expenses. Doing this can be a bit difficult, but it’s the best way to ensure that you know how much money you burn monthly, which could help you meet financial obligations like payroll, bills, and rent.
You can begin your monthly review by totaling your operating costs for the month and then multiply the amount by the number of months you want to save up for. Remember, you’re doing this for peace of mind so that whatever the weather or downturn, your business will stay safe and secure.
Saving a year’s worth can be tempting; however, it may hinder you from reaching business goals. For this reason, it’s always best to speak to your chartered accountant and find the best option for you.
Step 3: Start Saving Money
Finally, it’s time for you to start putting some money aside, and the best way to do that is to divert your profits to a separate account that could be accessed immediately. And ideally, you want to do this until you have a secure cash cushion — your accountant can advise you on how much to put aside every month.
The Bottom Line: A Cash Cushion is the Ultimate Safety Blanket for Your Business
A cash cushion is meant to protect your business from unexpected changes, such as a decline in the market, a global pandemic, or unexpected bills and penalties. Depending on what business you have, your rainy-day fund may vary, but the bottom line is that it’s important that you start saving now and to work with a reputable and cheap accountant so you can hit your financial goals with ease.
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