It’s no secret that disasters happen even in business. But are you ready for it? How much money do you need in your emergency savings (Rainy day fund) to help you in the case of those moments? This question is the question we are going to tackle today.
First, we need to determine what your current monthly expense is in your small business. If you use a bookkeeping software, this will be pretty easy to do. Print out last years, Profit and Loss report (P&L) and categorize it by month.
As you can see in the image above, I changed the date to Last fiscal year, the date range automatically varies. Then, you need to select Show Columns: Month. This task will show you each month breakdown.
How to analyze a year-end P & L Report?
On your report, analyze things like payroll, fringe benefits, taxes paid, the monthly cost of goods sold, and general office expenses like office rent, car insurance, liability insurance, etc…
NOTE: if you are using a credit card that isn’t a part of your QuickBooks Pro, go to the website and analyze your data in the report from your credit card company. They usually give you a business report at the end of the year to help with taxes. This report is a great asset because it will provide you with totals and when it charged.
After getting this information from all your reports, add them up on a SEPARATE spreadsheet. If you don’t want to recreate the report QuickBooks Pro allows you to export this P&L report into Microsoft Excel. You will then be able to add the additional expenses to the report and modify the labels and headers will already be there. In Excel, inserting rows work great to add information to this report. Make sure that you add the amount to the bottom totals for each month.
Now, let’s find where we can save the money for the emergency savings.
After you got all this information and looked at all your fixed expenses (rent, insurance, etc…) and all your variable expenses (payroll, cost of goods, telephone, the internet, etc…), now it is time to really figure out where you can cut your expenses to be able to save. I like to look at the following areas on the P&L to do this:
- Insurance (car insurance) – car insurance can be revisited each year to see if you can save. I have in the past, contacted my agent, and they reassessed the policy, and it turns out we saved an additional 50 dollars each month. Wow. I should have done it sooner.
- Internet – If you went with another provider, would you get more money back?
- Cellphone or Telephone – Should you change mobile phone plans? Do you need a landline anymore?
- The Cost of Goods Sold Products you use. Is there another product you can use instead that is more affordable? Note: this may compromise your quality of service so do with caution.
- Office supplies – Maybe you can get those reams of paper you buy each month cheaper.
- Monthly service costs – do you need the service agreement monthly fee for your new computer?
To find the money to save in your P&L, ask yourself questions like:
- How often do I use this service?
- Does this add to my business quality?
- Does this add to my businesses reputation?
- Is there something else I can do to improve my product or service without sacrificing my reputation?
Now, that you found some money to save for a rainy day fund, where will you put it?
Some companies make a mistake and put the money in the stock market. I recommend saving your money in a more liquid account. This means an account you can use right away or within a day or two max. Creating a money market account in your bank is the best bet. Sure, you are not going to get a significant return these days. But, the advantage of having access to the money for a rainy day is a priority. You are not here to make a massive return on the capital, you are here to use it but only for emergencies.
Caution: Make sure your bank is insured to protect your money if they have an issue.
How to save the money without doing too much leg work?
Many banks off a way to create an auto transfer to the money market account. Ask your particular bank for details. This way, you know how much gets transferred each month. I like using the minimum amount and then move the excess profit (if any) manually. This helps keep the expenses under control.
How much to save?
That is really up to you. Each company is different. Some companies save thousands each month, and others save one hundred dollars. The trick is to save extra for those months where you have a more substantial profit so on those other slower months you will feel more at ease if an emergency comes up.
What is an emergency?
Now that you saved all this money, when can you spend it? I recommend making a list of the possible emergencies scenarios, like food costs increase in the winter; subcontractor costs are high due to more work in the summer, etc… Above all else, be sure everyone who is responsible for spending in your business knows these scenarios.
I hope this helps you create a small business emergency savings. And, I hope you don’t have to use it. Happy saving!
Now, it’s your turn. What areas do you look at when you need to save some money? Please leave a comment below. I look forward to hearing from you.
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