How do I go about building a financial nest egg for my business?
Saving is hard – especially for entrepreneurs wishing to reinvest in their businesses’ growth. Still, it’s important to create a rainy day fund you can tap in case of a business emergency. Here are tips to get you started.
Set a goal. It’s okay to start small. Calculate your monthly business expenses and aim to save two months’ worth. During the early days of saving, seek to “live within your means,” spending less each month than you bring in. Once two months of expenses are saved, increase your goal to six months of expenses. If you tap into those savings, repeat the process.
Pay yourself first. The first payment your business should make each month is to its own savings account – even if it’s a small amount. The important thing is to build savings discipline. When business is trending up, increase your monthly savings contribution. If you must reduce it during slow periods, so be it. Even a small symbolic contribution is good if it helps you stay in practice.
Invest simply and safely. If a business emergency hits, you may need cash quickly. That’s why it’s a good idea to keep at least some funds in a savings or money-market account that you can easily access for cash. Talk to your banker or financial advisor on how best to build your emergency fund portfolio. CDs, mutual funds and other low-risk investments can help you accumulate funds more quickly than larger ventures.
Reassess your needs. As your business grows, so do your expenses. A six-month nest egg, in other words, may be just a three- or four-month reserve in a few years. Plan to revisit your monthly expenses regularly and adjust your saving accordingly.
The bottom line: small business income can be unreliable. Stockpiling emergency funds is like buying business insurance – except you keep the “premiums” even if you never file a claim.