When starting a business, counting the profit margin isn’t necessarily the first step to plan for success. You should consider not just a profit plan but also the potential for losses.
Expect unforeseen events, anticipate a loss of income, and abrupt changes that can cause you to close the doors. Create a sound financial foundation and be ready for the unexpected. It’s a smart choice to set aside extra funds so there is no interruption to operations. Here are five reasons why you need a rainy day fund for your business:
1. Sudden emergencies
At the time of this article, we are experiencing a worldwide pandemic of proportions most of us have ever seen. In times like this, we truly understand the meaning of an emergency.
Emergencies may require a large or small pool of money. But having a rainy day fund will lessen your worries. You get to have enough or maybe more than enough funds to spend and help you keep the business running during this unexpected time.
2. Unexpected expenses
In business, there are fixed expenses that you need to consider as part of the annual costs of running a company. Besides, you should always be prepared for unexpected outlays that may surface. Keeping a rainy-day fund will help you have peace of mind that there are reserves available to cover sudden surprises. You can use it when the need arises.
3. Expanding your business
If your hard work has created a successful enterprise, you may consider that now it is time to expand. Saving for a rainy day fund doesn’t merely mean using it for sudden situations.
Growing your business needs additional capital, and you have saved a rainy day fund, you can free yourself from the stress of generating the funds required for expansion. Remember that expanding requires a more significant investment, and that means you need more in savings.
4. Hard-luck business
As with most businesses, you don’t always win. The Small Business Association states that 50% of small businesses fail after five years.
If you are in the percentage of companies that did not reach success, your rainy-day fund will be a crucial resource to spring-board your next venture.
Now is the time to develop a backup plan and begin your next project. Your rainy-day fund can become a stand-alone asset that did not apply to the business loss you experienced.
You can use the fund to start again without seeking outside capital. You have the added benefit of being wiser when making significant decisions in your next venture.
5. Minimizing debt
Starting capital for a business can come from many sources. Most entrepreneurs borrow money to start a business. If you’ve set aside money for a rainy day fund in the planning stages of your business, you can minimize your debt by borrowing less. You can reduce interest expenses and stick to a reasonable budget that allows you to make monthly payments on time without worry.
Final Thoughts
Setting goals and objectives in starting a business will help you succeed. One important goal is to maintain a rainy day fund. Establishing it needs strict discipline. You need to require yourself to treat it as you would any other expense to generate momentum and reach your business goals. Reduce spending and find ways to cut back on costs.
With hard work, you will be delighted with the efforts you have pushed past to maintain savings. It will benefit you in many ways, in addition to the cases mentioned above. You may even consider using this fund for retirement or other investment vehicles in the future.