Many expenses can be planned for in business. Others however are hard to predict. An emergency fund can be a useful way of paying for these unexpected costs. This involves setting aside savings that you can dip into so that you don’t have to borrow money and pay interest. Below are just some of the unexpected costs that are worth putting an emergency fund in place for.
Disaster recovery
Disasters such as fires, burglaries, cyberattacks and flooding may be relatively rare, but they can happen and they can be very expensive to recover from. Even if you have commercial property insurance or cyber insurance in place, an emergency fund could still be useful for paying for any deductible. Even in instances such as the current pandemic, an emergency fund could be useful for funding downtime.
Late payments
Many companies have to deal with late paying clients. These late payments could affect your ability to pay your own suppliers and staff. An emergency fund gives you some money to dip into so that you can continue to pay suppliers and staff until your client pays up. This stops you from getting into arrears and creating a cycle of late payments.
Chargebacks/refunds
Cash reserves are sometimes mandatory for high risk merchant processing – this is when there is a high risk of credit card chargebacks as is the case with certain industries such as pharmaceuticals, gaming and gambling. An emergency fund can also be useful for companies that regularly have to give out refunds such as travel industry companies. You don’t want to be taking out a loan for a customer refund.
Lawsuits
Many businesses have to face lawsuits. While certain types of insurance can sometimes provide legal compensation, there may be times when you still need to pay a deductible or need to pay compensation for something that you are not covered for.
Equipment/premises repairs
Your business may not be able to run without certain equipment. If this equipment breaks, having an emergency fund can be useful for helping to pay for repairs or a replacement. An emergency fund could also be useful for paying for repairs to your premises such as fixing a broken roof or repairing a plumbing leak.
Employee turnover
There may be times when employees leave without warning or need to be dismissed. You may then have to find money for redundancy pay or you may need to quickly pay for some job advertising. An emergency fund can be useful in these instances for helping to cover such costs.
Sickness absenceIf you run a solo business and you fall sick, you could lose out on income. While you can take out income protection insurance, an emergency fund could be a cheaper option in the long. An emergency fund could also help you to recover any lost income as a result of integral employees that may have fallen ill.
