- An emergency fund acts as a financial safety net, enabling businesses to navigate unforeseen challenges.
- Maintaining an emergency fund may prevent businesses from needing to borrow under unfavorable terms, particularly during periods of high interest rates or financial strain.
- Creating an emergency fund requires disciplined financial planning and possibly reallocating resources or trimming expenses.
Business owners and managers have many responsibilities. One of the most important is protecting the business. An emergency fund is a critical tool businesses can use to safeguard their operations and their assets.
In today's ever-changing business landscape, uncertainty is one thing you can count on. Whether your business is an early-stage startup or a larger and more established operation, success hinges on the ability to seamlessly navigate through unforeseen crises and take advantage of unexpected opportunities. An emergency fund can help you do both.
Establishing a sufficient emergency fund involves a strategic approach. Keep reading to learn how an emergency fund can help strengthen your business and the practical steps you can take today to set your business up for success.
Why Every Small Business Needs an Emergency Fund
You've likely heard this before — fail to prepare, and you're preparing to fail. In today's marketplace, this saying may be more applicable than ever. A wise step to take today to prepare your business for tomorrow is establishing an emergency fund.
Imagine a large customer cancels a long-standing monthly order. Or an expensive piece of equipment suddenly fails, and a replacement part is on back order. An emergency fund is an account that holds money for those types of proverbial rainy days. Whether that rainy day is an unforeseen economic disruption or an amazing opportunity your business needs to jump on to maintain market share, the emergency fund acts like a safety net. It enables your business to keep operating as usual while also handling the unexpected in stride.
Regardless of how the financial shock takes shape, an emergency fund will fortify your business and enable you to:
- Keep calm and carry on. With an adequate emergency fund, you may keep the doors open, pay employees, and maintain business continuity— and your reputation — while you address the situation at hand.
- Avoid debt with unfavorable terms. An emergency fund alleviates a "must borrow" situation, which is especially important when interest rates are high.
- Maintain strategic focus. The financial freedom provided by an emergency fund unlocks your ability to make strategic business decisions that can benefit long-term growth without worrying about short-term cash flow problems.
How To Build a Business Emergency Fund
Having an emergency fund can be a game changer for your business. Follow these three practical steps to begin building a business emergency fund today.
Step 1: Calculate How Much You'll Need
Since every business is different, how to calculate cash requirements for the emergency fund will vary. Some financial advisors suggest that, given today's economic climate, aiming for a larger emergency fund — covering six to twelve months of expenses — can offer additional security.[1] This way, there's no disruption to payroll, rent payments, and other critical operating expenses in the event of an emergency.
If your business regularly experiences higher-than-normal volatility or seasonal revenue fluctuations, those unique circumstances are also important to consider.
Step 2: Establish a Separate Account
Separating your emergency fund from other cash accounts is key. This reduces the likelihood that you'll dip into these funds for non-emergency purposes.
You'll want to keep these funds liquid so you can access them quickly. With a high-yield savings account, the funds are ready to access when needed. Plus, your deposits earn higher-than-average interest rates.
Step 3: Rebalance the Emergency Fund as Necessary
While it can be tempting to treat your emergency fund with a "set it and forget it" approach, business growth or changes in operating expenses may require a more substantial cushion. Periodically review the account on an ongoing basis to ensure the balance aligns with your changing needs.
Discipline Now Means Agility Later
Putting aside extra cash isn't easy. It may require carefully reviewing your financials to find opportunities to reallocate funds or trim expenses.
When and how you establish your emergency fund will vary based on the specific needs of your business. And you may need some guidance to make it happen. There are resources that business owners like you can take advantage of, including PNC’s Starting Your Business page and our numerous small business advisors who specialize in helping owners begin and grow their operations.
For more information about these services, visit our site today and learn how PNC’s products and services can help your business.
