It’s a good idea for all companies to keep emergency cash on hand in case it is required. Things may happen that, if there is no additional money available, could be disastrous to the company and the individuals who work in it. No matter how long you’ve been in business, having an emergency fund is always a good idea. Here are a few reasons why you may need the money and why you should have it just in case.
Your Debt Has Been Recalled
The majority of companies will incur some level of debt, this is entirely normal and something that many individuals believe is essential when starting their own business. This debt could be a loan, a credit card, or an overdraft on your bank account. Whatever it is, it’s typically linked with a set term. However, these loans are occasionally called in early – read the fine print of the document you signed to see whether this might happen to you. Paying back a loan on short notice can be difficult, which is why having access to money when you need it can be beneficial. It’s easier to use your saved emergency money than it is to find a new loan or ask to borrow money elsewhere to service this particular debt.
You may have been earning a nice profit, but then something occurs, and your profits are no longer as good as they previously were. It’s possible that the market in your industry could collapse or that a supplier or large customer will go out of business or opt to deal with someone else. Suddenly, the money you were earning starts to run out, which can be disastrous for a small company.
However, if you have emergency funds on hand, it’s not that terrible. You can utilize that money to bridge the funding gap between your current situation and however you plan to improve your profits. There is no need for your business to close if you can find the funds to get you through the tough times and have a backup plan in place to attract new clients or earn more money. It should always be your choice to decide when it’s the right time to sell, not anyone else’s.
Too Much Confidence
Overinvesting in stock is another reason your company may be running short on money and therefore needs an emergency cash injection. It might seem to be a good idea to purchase a large number of goods if they are on sale or if you imagine that you’ll be selling a large amount and you need to make sure you have enough stock. However, this strategy may not always work, leaving you with extra inventory that no one wants. You can’t get your money back because no one wants to buy it, and you can’t buy different stock since you don’t have any cash.
If you have an emergency fund, you can purchase the new stock and start selling it while you figure out what to do with the old stock. Simply to make sure it’s gone, you may have to sell it at a loss, but if you have a fresh product that you can sell at a profit, it isn’t such a big deal.
If you’re operating on a business-to-business model, you’ll almost certainly give your customers and clients credit – typically for 30 days. However, not everyone will pay within that time frame, which may severely impact your financial account. Slow-paying clients who are nearing the end of the credit limit you have given them can make or break your company if they pay or don’t pay; it can be that close.
You can utilize whatever savings or emergency funds you have while you wait for them to pay. When they do pay, you can deposit their funds directly into your emergency fund (or pay off the loan or credit card you used to plug the gap until they paid). It will be irritating, but companies that are given credit will most likely take some time to pay, so as a business owner, you must be prepared to budget for this.
Sometimes they won’t pay at all, which will obviously have a significant effect on your company, particularly if they owe a large sum of money. Although you cannot always anticipate this, it’s prudent not to provide credit to a business with a bad track record (you can check this up online to determine their credit score, for example). You should ask these companies to pay in advance.
Depending on the nature of your company, you may discover that there is seasonal demand for your product or service. When sales are low, you might need to depend on your emergency funds until they rebound. Knowing that your company will operate in cycles is essential since it allows you to prepare for it. Outdoor sports, yard work, perhaps vehicle cleaning, and various other activities will be more popular during the summer, while work will be limited during the winter. Similarly, you will have busier and quieter times if you operate a Christmas-related company or anything related to Easter. Prepare for them ahead of time so that you don’t run out of funds before sales resume.