Any company needs an emergency fund to cover unforeseen expenses. Economic changes, legislation or tax settings can also result in financial volatility for a company, and this can be daunting without a safety net. The national shutdown put due to COVID-19 has shown the critical need for small businesses to have emergency funds to sustain a business or remain viable while full or partial closed.
The emergency fund is indeed an important resource that you must hold intact to handle emergencies. It is a fund that you can rely on at the time of turmoil or for unforeseen and unexpected scenarios, and not for reaching your regular expenses. So, you must plan it explicitly to overcome unpredicted financial shortfalls that may happen to your business.
Most companies struggle due to a lack of planning for the unexpected, below are some of the main reasons why SMEs needs an emergency fund –
1. Ensures Business Security –
Apart from providing for unexpected emergency costs, one of the main advantages of emergency funds is that t it will help secure your financial security. Emergency funds would thereby prohibit you from borrowing funds or taking loans in order to save your company.
2. Risk Reduction -
An emergency fund reduces the risk of being sabotaged by a number of unforeseen issues that can come up: illness of the owner or key employee, deterioration in the business or interest in the product, or a recession or downturn in the economy. Having an emergency fund helps you to continue operations during a difficult time.
3. Cash Flow Issues –
Keeping financial resources that are sufficient and easily available in the survival shield will keep your company going as you wait for payments to be received. It will also stop you from risking undue expenses because you will not have to lend funds to cover ends meet. Collecting debt by credit lines to fund problems and shortages is a major reason why so many SMEs fail over the first few years.
4. Can Avoid Loans –
When you face financial difficulty while managing your business, you apparently have to use personal funds to mitigate it. Facing a multiple sales decline, most small businesses reported they would need to act immediately to increase financing or reduce spending by approximately half.
5. Cannot Risks Employees –
You apparently do not need to depend on excessive credit or incur extra payments. Without an emergency fund, a decline in income may mean that you may not be able to pay your company bills on time or investment in the company for growth, which means you could be placing your operating costs on credit cards or paying late fees, and sometimes you would not be able to pay your employees and will have to lose powerful workforce.
Types of Emergency Funds –
1. Long Term Emergency Funds –
This is the place where you put something aside for enormous scope crises like a significant tragic event or an unexpected health-related crisis. This asset ought to be put resources into instruments that permit you to procure a somewhat higher pace of interest yet may several days to exchange.
2. Short Term Emergency Funds –
This is the asset you race to in instances of crises. Such an asset should offer minimal regarding intrigue yet permit quick availability, which in the event of extraordinary circumstances can do the trick till you access your drawn-out crisis reserves.
Where to Invest for Emergency Funds?
Whenever you have gathered the undisclosed reserve, you should not leave it in real money or the account book, in any event not altogether. Despite the fact that a backup stash ought to be fluid, it isn't something you can get to regularly. Henceforth, put it in a way that you acquire respectable gets back from it without settling on liquidity. The ideal activity is spread the secret stash across fluid assets, transient RDs and obligation shared assets.