Not all businesses have a rainy day fund, or business savings account, but having one in place is strongly advised, because you never know when it will be needed. If you run a business, you likely have a business checking account. Having an additional account to build up a rainy day fund will give your business an extra security blanket and cash reserve that can help you through tough times or help you grow when the time is right.
When times are good, put what you can into the account, and help it grow over time. In fact, it's not a bad idea to set up automatic transfers from your checking account to your savings account so that you don't need to do it manually. The money will always be there if you need to transfer some back.
A rainy day fund can also prove quite useful when disaster strikes, whether it’s a lockdown caused by a pandemic—which nobody anticipated would happen in 2020—or a catastrophic weather event like a flood or earthquake.
Disasters are just one thing that could fall into the category of an unexpected event. "A key employee may leave suddenly and you need to recruit a replacement," the SBA suggests.* "Your competitor across town is retiring and has offered you her business. You may work out a deal with your competitor to pay her over time, but you’ll pay more for the deal than you would with cash." Having cash available can save you the extra expense of paying interest on the purchase.
One major advantage to having a rainy day fund is that it can help you minimize your debt, thereby reducing interest expenses. "Typically, you’re required to make monthly payments of interest and principal," the U.S. Small Business Administration notes. "Say you borrow money for a special project you anticipate will generate substantial profit. You likely will be servicing the loan before you see any revenue from the project, requiring you to use other funds to repay the loan.”
When it comes to setting one up, you'll need to consider the specifics of your business. Different businesses will have their own approaches to the amount they need to save, and future plans should certainly factor in. Some businesses by the nature of their industry will have to consider holding back more to mitigate certain risks that come along with the job. If there is a potential for lawsuits, for example, having a larger fund is recommended. Seasonal businesses may also need more cash reserves to help them with expenses during slow times.
You should even be thinking of your rainy day fund beyond its potential impact on the business itself because it may outlast the business and could potentially become part of your retirement fund. If you are forced to shut down your business, it can also serve as a cushion to get you through the time it takes for you to start your next venture or find employment elsewhere.
The important thing to remember about your rainy day fund is that it should never stop growing, because the more it grows, the more helpful it will be when you need it. In fact, it's not a bad idea to look for ways to cut costs and reduce spending so that the savings can be applied toward the fund. Look for ways to reduce your debt. Make sure you're getting all the tax deductions you're eligible for. Cut down on unneeded expenses. When the time comes that you need significant funds – whatever the situation may be – you'll be glad you made the effort to put together a sizable savings account.
1. https://www.sba.gov/blogs/creating-savings-account-your-business
