Stashing Cash for the Next Business Downturn

Could your business cover the cost of a new vehicle if yours were to suddenly be out of commission? What if you found that your biggest client was moving out of the area and you needed to scramble to grow your client base?  What if you broke your leg and couldn’t run the business?

Keep reading and I’ll show you how to establish a short-term stash of emergency cash to get ready for that next business downturn.

Figure out how much you need to stash.
How much do you spend each month on necessities such as office rent, phone, insurance and payroll (you own) and anything you promised your employees. Bump up this number a bit to account for things like extra marketing expenses should you suddenly find yourself in need of a new major client. Multiply it by 3 or 6 (for the number of months that you want to cover). Start with 3 months if the number seems too daunting.

How much you can afford to save each month towards this goal.
Make sure that this amount fits into your budget. Make it one of those automatic must-pay expenses — just like your payroll and business insurance. Can’t seem to find the money; get help — that downturn is not going to have compassion. Maybe there is a way to tweak your pricing or billing to pick up a little more profits.  Shameless plug—this is the kind of stuff I do best.

Pick the right kind of account.
Since we’re talking about your emergency savings here, you should put that money somewhere you’ll be able to get your hands on it reasonably quickly… in case of, well, an emergency. It should also be in a “safe” investment –meaning one that won’t tank when the market corrects. That narrows it down to:
savings accounts
money market accounts
short-term investments

Not too easy to access.
If the money is too easy to get—you put the checkbook in your desk; you may use it for non-emergencies.  You may use it for some ill-conceived marketing campaign—not all are bad, just the ones that haven’t been thought through.   Put the money into an account that you need to think twice about before taking money out.  A good idea might be one that doesn’t have a check book, but you actually need to call your financial advisor.

Stash intelligently.
Check on the details before you proceed:
Interest rates are respectable.
Any fees are minimal.
Cost to purchase /maintain the investment.
Minimum investment required.

Beware: Some institutions will offer aggressive rates in order to lure your money, only to lower the rates within the same quarter.

Just do it—Now!
If you’re having trouble saving, I highly recommend an automatic monthly deposit. You can start with a smaller amount, and as business improves, raise it every three to six months.  The trick is to get started and keep building.  While the last economic downturn is still painful (and in fact some business owners are not sure we’re out) start getting ready for the next one if you want your business to survive and thrive.

As a former SCORE Counselor, small business profitability consultant, Certified Financial Planner and active member of the Berks chamber’s small business programs, Merra Lee Moffitt keeps her eye on the pulse of Eastern PA Business.  Having created and built her own 30-person company, she KNOWS how to solve small business problems. A recognized expert on service business issues, Merra Lee can be reached at 888-920-2030 or  © Copyright 2004 Merra Lee Moffitt.