Monthly Archives: January 2017

Saving Emergency Funds for Your Business

It makes shrewd business sense to build an emergency fund, cash put aside for a rainy day. Businesses that fail to have a ‘safety net’, a sum of money kept aside to pay for unexpected expenses, can find themselves in a whole host of trouble.

When working on a tight financial leash, for many businesses, creating an emergency fund can be easier said than done. The good news is, with a little astuteness and know-how, businesses can save for an emergency fund without really noticing.

Small Business Trends looks at 20 tips for building a business emergency fund.

Tips for Building a Business Emergency Fund

Got a Tax Refund? Save Instead of Spending It!

Having a tax refund arrive through your letter box is always a nice surprise. And surprise is the operative word here, as instead of going out and spending this refund you didn’t expect, make it the first instalment in your business emergency fund.

Spare Change? Put It Into a Savings Tin

It might be a lucrative way to encourage children to save up, but you may be surprised at just how much your company could save by tossing spare change into a saving tin.

Cut Back on Business Trips

Is that business trip to New Orleans really necessary? Or could the meeting be conducted remotely via teleconferencing software?

Take stock of how much your company is spending on business trips, and ask yourself which trips are absolutely essential, and where savings can be made. Use the money you save on cutting back on business trip expenses to put into an emergency fund.

Save when the Going Is Good

Is your business seasonal? If so, and you take in higher profits during particularly times of the year, seize the opportunity to use the high profit months to put money into emergency funds.

Keep It Separate

When emergency funds are simply placed into a normal business account, the urge to spend it can be all too tempting. Instead, keep emergency funds separate from other business bank accounts, so you can keep tabs on exactly how much you’ve got saved in emergency funds, and will resist the urge to spend it.

Be Realistic

If you’re a small business, a start-up, or even an established business with a tight cash flow, set realistic goals for emergency fund savings.

Putting too much away for a rainy day might put financial strain on your business. Set realistic goals, start off slow and gradually build up your emergency funds.

Make Emergency Funds Part of Your Business Plan

Statistics show that an alarming number of small businesses don’t have a business plan in place. Business plans are vital in conveying organizational structure, and setting goals, operational milestones and targets.

When mapping out a business plan, include plans and objectives for emergency funds. Putting such funds into an official business plan will mean you are more likely to stick to emergency fund objectives.

Use a Direct Debit

With ease-of-use and without having to worry about making late payments, direct debits come with many advantages to businesses. With clear knowledge of your regular income, direct debits can help improve business cash flow.

Use the ease and convenience of direct debits to help save for an emergency fund. Set up a direct debit to pay into the fund each month. Again, be sensible and realistic about how much you pay in so the fund doesn’t infringe too heavily on your business’s cash flow.

Only Use It for Emergencies!

It might sound obvious, but don’t be tempted to ‘break into’ emergency funds to pay for services and products that, quite simply, aren’t emergencies. Map out what you consider emergencies to be and only use the fund if such emergencies arise.

Put the Fund Somewhere It Can Gain Interest

You shouldn’t lock emergency funds away, as you could find yourself in an ironic position where an emergency has occurred and you can’t get to your emergency funds! That said, all savings should ideally be placed where they can generate some interest to help them grow.

Do your homework and look around for instant access savings accounts offering the highest levels of interest.

Motivate Yourself and Your Team About Saving Goals and Reaching Milestones

Motivate yourself in a similar way you would when making personal financial savings. When you reach a business emergency fund goal or milestone, give yourself and your team a treat, preferably one that doesn’t cost any money, such as a dress down day!

Cut Back on Outsourcing Expenses

Outsourcing business tasks such as marketing and bookkeeping comes with both advantages and disadvantages. Outsourcing might save your business time but, at the same time, it will cost you.

Revaluate your outsourcing expenses and see if there could be cutbacks you could make. With the savings you make by tightening the financial leash on outsourcing, put the money into your emergency funds.

Limit Other Business Expenses

Of course, business trips and outsourcing are not the only expenses businesses can be a tad lavish with. Assess your business expenditure and see where additional savings can be made and put into emergency funds – Is today’s business lunch at a local restaurant really needed, for example?

Steer Clear of Impulse Buying

Resist the urge to spend money on a whim. Every dollar saved or not spent, is a dollar into your emergency fund account.

Consider Your Emergency Fund As a Non-Negotiable Expense

Be serious about saving for a rainy day by treating emergency funds as non-negotiable expenses.

Work With Your Financial Advisor

During the next meeting with your financial advisor, bring the subject of emergency funds up. Let your financial advisor offer support and advice on how to structure your emergency fund savings.

Make Use of Budgeting Tools

Keep on top of your business finances, including emergency funds, by taking advantage of budgeting and bookkeeping software, tools and apps.

Generate Extra Cash

If you’re struggling to find the money to put into an emergency fund, go that extra mile to generate additional cash. From recruiting another member in the sales team or introducing an additional product, generating an additional business income will soon help the dollars mount up in your emergency fund.

Introduce a Savings’ Competition at Work

Motivate employees to reducing expenditures by establishing a monthly competition, which offers prizes to the biggest savers.

Create a More Competitive Climate

As well as encouraging members of staff to making greater savings where possible, craft a greater sense of competition at work. Rouse sales teams by setting sales targets and giving away prizes to the person with the highest number of sales at the end of each month.

Put the additional income both saved and earned into your soon-to-be flourishing emergency fund account.

Financial Business Decisions

Many small business owners lack the skills to make good financial business decisions. But it is not always a result of their lack of experience, interest or education in this difficult area.

The Effect of Human Nature on Financial Decision Making

According to John Howe, author of “The Foolish Corner: Avoiding Mind Traps in Personal Financial Decisions”, it involves human nature and the evolutionary instincts that take over inside of every person when faced with these types of choices. He says that the first step in making better financial business decisions is to be aware that there are internal biases that are affecting each outcome.

They include:

1. Overconfidence. This is when the small business owner is so sure of the outcome despite market data and feedback telling them otherwise. They do need optimism, but when it mushrooms into blinding overconfidence, they ignore reality and it becomes a problem.  This happens many times because they have made a big financial bet where they do not feel they can turn back. Solution: The successful small business owner knows when stop, pivot and move on to a new strategy.  A safety switch to insure against overconfidence is to have reliable sounding boards from trustworthy sources. These can’t just be “yes men” that will agree with every financial business decision the owner makes. Rather, they need to be advisors or mentors that can play a devil’s advocate role and are not afraid to disagree on a regular basis.

2. Supercharged emotion. Financial business decisions around money can be emotional. Things like wanting to win at any cost or extracting revenge based on the past can also be factors. Overall, most competitive small business owners hate to lose at anything. This can only end up clouding their judgement.  Solution: Base decisions on results from a variety of sources. Ask advisors who are not emotionally involved with a particular decision to give their viewpoint. The small business owner needs to try to name the emotions they are feeling that are not grounded in fact based conclusions.

3. Internal bias. Every owner has a predisposition they bring to any decision making. It helps them frame the problem and then, the solution. In their own mind, this is based on what has worked or not worked in the past. Solution: A small business owner needs to know that their outlook is not always accurate or actually optimal. Again, ask an advisor who is outside the company or the process to give their viewpoint.

4. Peer pressure. For many small business owners, it is more comfortable to follow what others are doing. They make financial decisions based on what is popular or generally accepted since they want to “keep up with the Joneses”. They are afraid if they do not invest when or how others do, they will be single out as a loser when everyone else has success. Solution: Get comfortable in dissenting from what others think. Analyze the decisions to be made with all the pros and cons that are separate from any outside pressure or paths that others have taken before.

It’s a balancing act. Small business owners do need to trust their experience and instinct when making financial business decisions. At the same time, they need to understand what gets in the way of the an optimal outcome.

Loans, Cash Advances and Factoring

Getting the right financial product for your small business is important. However, entrepreneurs should be careful about which small business financing options they choose. Some make more sense for your company than others. Small Business Trends talked with Hanna Kassis an expert at Segway Financial about how to differentiate between loans, cash advances and factoring.

“The biggest difference is cash advances and factoring are not loans, although sometimes they’re disguised as loans,” Kassis says. The trick for small business owners is in understanding how to pick the financial product that works to make their situation better.  Choosing the wrong path can lead to deeper financial issues if your small business is in some trouble to begin with.

Here’s a chart showing the benefits of  the various types of financing depending upon your business needs:
The Difference Between Small Business Financing Options

Small Business Loans and FICO

There are some fundamental differences. For example, small business loansreport to the credit bureaus about the credit of the business and not the owners. These are generally the way to go when you’re looking to make a long term investment in your business.

A good FICO score is required. All your company assets can be used as collateral and funding usually takes about 3-7 days. Use these when you’re on a stable footing financially and looking to grow or expand. Small business loans are a great way to replace outdated machinery and even build a new wing.

Miss a payment on one of these and it gets reported on your business credit. With the other two types, that kind of slip up gets reported on your personal credit.

Merchant Cash Advances and Factoring: For a Different Set of Business Needs

These other products have a different set of requirements. A merchant cash advance is a good product for an emergency financial situation. Factoring is the right tool to match income and expenses. With the merchant cash advance, cash flow history is required but your small business doesn’t need to supply any collateral.

Factoring, on the other hand, requires actual invoices and those receivables and invoices are used as collateral.

Kassis notes another difference between the two products.

“Companies that qualify for factoring are typically B2B under unfavourable terms,” He says. “That delayed payment could be a result of the seller offering it to get business or the vendor offering it because they’re spending enough money they can dictate the terms of the deal.”

Say you’re selling bolts to a manufacturer. They’re buying in volume and keeping you busy, buy not paying for terms of 30, 90 or ninety days.  Factoring can help you can over temporary cash crunches. These products generally take about  2-5 days to process.

Sending Invoices

If you send invoices, you have a wider range of options. Those choices are limited for enterprises like grocery stores that accept cash up front.

“Businesses with invoices will qualify for factoring, cash advances or a loan,” Kassis says. “Businesses that don’t invoice can only get a cash advance or a loan.”

Cash advances are the quickest solution to get but you need to be careful when you make a decision to go after one of these. There is no collateral needed here and the time to fund is quick at 1-3 days. However, Kassis is clear small business needs to take a good look at why they’d need this type of money before they act.

“The cash advance is the catch-all. With about $10,000 a month from any source, you can probably get one of these products.”

Cash Advance Catch-all

However, there’s a big caveat to this catch-all. Kassis explains this is a great product for seasonal businesses and restaurants in tourist areas. Both of these small businesses might need some cash ahead of their busy season.  He’s clear, however, a cash advance won’t stop a downward business slide.