Entrepreneurs, more often than not, are focussed on profits and future projections. Although they do accumulate a substantial amount of working capital to operate the business during the initial challenging years, they usually forget to save for the rainy day. The idea of a recession hitting the industry or a highly invested project falling apart doesn’t cross their mind until a calamity is knocking on the door.
However, these are genuine roadblocks that can bring down a flourishing entity and leave them scouring for funds to stay afloat. This is the reason why veterans and seasoned businesspersons insist on creating an emergency fund that acts as a safety net in the time of a financial crisis. It boosts the entity’s financial security but saving money while running a business can be tricky.
If you are planning to purchase a profitable business for sale in Australia, then you must be aware of these steps that can help you build an emergency fund for your organisation. Sometimes referred to as retained earnings, this fund can support a venture to recover from an unexpected financial upheaval. Let us take a look at how it can be built.
1. Start Making Savings From Your Revenue
Create a separate business emergency account and start putting a small percentage of your annual revenue into this account. Keeping it separate is essential as it will restrict you from eating into the savings. Also, you will be able to check the balance and know how much you have been able to save without getting confused.
If you are able to put aside even 10% to 30% of the total annual income for the emergency fund, you can secure three to six months of business operations during the shortage of capital. However, the percentage should not affect your finances, and you must set a realistic target depending on the cash flow. You can start with a small amount in the beginning and increase it as you keep growing. You must make it a part of the business plan so that it doesn’t seem like an out of place or forced adjustment.
2. Cut Down On Unnecessary Expenses
The modern ways of running a business have piled up expenses, which include business trips, company lunches, wasteful parties and growing energy bills. Make a list of such costs and identify the needless expenditures. Follow the savings path and encourage your employees to follow suit. So instead of going on the business trip, make arrangements for a video conference and organise parties in the office rather than spending huge amounts in lavish restaurants.
Switch off the lights and office equipment when not in use and opt for energy-efficient bulbs and appliances. Outsourcing activities like bookkeeping and software development can prove to be expensive. Thus you must focus on hiring talent in-house to get the work done. All the money saved with the help of everyday money management can be put in the emergency fund.
3. Hire A Professional To Guide You
A financial advisor is the right person to help you in your quest of stocking up some cash for the difficult phase. They can guide you on making sound and calculated investments when required. A seasoned advisor will also assist you in restricting expenses and focussing on generating more capital through the identification of profitable projects.
Tools like cloud-based bookkeeping software can further aid in budgeting and forecasting. The professional can also help you to save taxes by taking advantage of the small business concessions and tax deductions. Also, they will inform you about the best interest rates to gain more on your savings.
4. Generate More Capital
If you think you will not be able to meet your emergency fund milestone, then you must create a high-income environment in your organisation by boosting sales. Implementing sales-driven policies and motivating employees with personal targets can help in amplifying the cash reserves.
Besides setting sales targets for the sales team, you must establish savings targets for your teams. The teams with the biggest savings can be awarded incentives, and the additional amount can be added to the emergency fund. When the business generates more capital, it will be able to save more reserves.
5. Make Small Contributions With Every Project
While you will be making a significant contribution at the end of the year, it is also necessary to make small donations after the accomplishment of each project or on the receipt of payment. It will ensure that you are working towards your emergency fund goal and will achieve it by making little inputs on a regular basis.
You can also opt for automated transfers to the savings account so that you do not have to go through the hassle of manual transactions every time. Be wary of the challenges that can lead to higher financial investment, such as an economic downturn, increased taxes, inflation, etc.
6. Spend Only In Case Of Emergency
The most significant aspect of saving an emergency fund is to keep it stashed away safely and use it only when the survival of the business depends on it. Control the urge to take out money from it for utilities or other minor expenses as it can imbalance the financial projections. You will be able to build a substantial amount only if you keep saving rather than spending.
So make sure that this money is not spent in a haphazard manner and is used for its real purpose judiciously. For this, you should not keep all the money in the savings account. You must spread it across different platforms like short-term recurring deposits or mutual funds. However, make sure that the liquid funds you are saving can be readily redeemed in case of an emergency.
7. Set Aside Money For The Payments
While you are making contributions to the emergency fund, you must work towards creating an amount that will be able to pay for the wages for three to six months. The cash reserve projections must take into consideration the unplanned expenditures that can affect the amount saved every month.
If you are able to save more than you estimated, then you can use this additional capital for reinvestment into the business and expand it further. The key is to manage the finances like your personal savings fund and stop extravagant activities to stay cash-rich.
Unforeseen expenses can put the future of your company in jeopardy. As a budding entrepreneur looking for business opportunities in Australia, you must strive to build a solid emergency fund that can act as your back-up plan in case of a crisis. It can help you reduce the risk of failure.