Why Should Small Businesses Step Up to Build their Rainy Day Funds

By Consultants Review Team Monday, 16 March 2020

In a world where Covid19 pandemic has shaken the entire economy, investing and saving has become more important than ever before. Within a short span the impact of coronavirus has completely changed the economic landscape of not only India but the entire world. With industries locked down and factories being shut and shopping centres being closed, the economy itself had to face a major blow in the face. Companies that were planning to expand this year are now cost cutting and relieving employees. Most others are rolling out pay cuts during a month that normally witnesses increments and promotions.

The modern-day business environment is too dynamic and sensitive to predict what is going to happen in the future. Businesses should know the importance of having a backup when unexpected events happen. Companies both big and small should have to put aside some money to deal with the risks and expenses that haven’t been forecasted. With more and more examples of companies closing their operations owing to poor financial management, it is high-time that small companies treat this seriously. 'Rainy day funds' is a technique that small companies can adopt to turn this situation around. Simply defined, rainy day funds are reserved amounts of money that can be utilized by the company at times of uncertainties such as disruption in the regular flow of income or decrease in the sales. These set aside funds will help companies to stay afloat in times of adverse financial circumstances.

There are various other reasons why having rainy day funds is essential for the survival of small scale companies and some of the important reasons are:

1. Preparing for Uncertainties: One thing that is certain in today’s business scenario is that unexpected things will happen. Sometimes all things will go south for the business and having a rainy day fund will help small organizations to break their fall to a certain extent. Money is the lifeblood of every business and having a backup will help the organization to concentrate more on their day to day operations rather than feeling worried about what happens if something went wrong. Rainy day funds will also allow companies to deal with business emergencies much more efficiently and effectively which will improve the operational efficiency of the business.

2. Better Budgeting: Setting rainy day funds will allow companies to reevaluate their budget. This reevaluation may help the organization to rethink the unwanted expenses they have written-off. A further look into the matter will help businesses to identify and avoid making unnecessary expenses. Differentiating essential expenses from avoidable expenses will also allow the company to increase their profit share and this amount can also be transferred towards the rainy day funds making the foundations of the company stronger and stable.

3. Investing Confidently: One important aspect of the modern-day business is investment and companies can use investment as a tool to not only increase their profit but also expand their business operations. Having rainy day funds allow companies to invest much more confidently owing to the fact that even if they messed up the investment, they have something to fall back on. If no provisions are set aside for rainy day funds, then the company will have lesser opportunities for investing and if the investment doesn’t give back the expected returns, the money that is used for the day to day operations of the organization will be sacrificed. This will have massive adverse implications on the overall performance of the company.

4. Improving the Organizational Discipline: Saving for a rainy day will also help companies to take control over their expenditure and income to a certain extent. This control will help companies to ensure that they can make necessary adjustments that will help them to reduce their expenses and increase their revenue. This, in turn, will help the organization to cultivate a discipline that will help them to achieve more success and acquire the mindset to face new challenges and expand the business.

Proper cash management is crucial to not only survive but sustain in the market. With the market getting more and more competitive as the day goes by, the chances are there might be a pothole just around the corner. Rainy day funds will ensure that, even if the company takes multiple hits financially, there is a last resort that they can depend upon.

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