How much should your business have in savings?
Business savings are a must. Without cash to draw on, your company may not survive unexpected challenges. Here’s how much your firm needs in reserve.
Running a business is about more than making enough money to have a productive working life. If no profit remains after paying your bills, you could be in trouble should business take a nosedive.
The old adage that a business lives or dies by its reputation is true, but trustworthiness is only one factor. A company can also fail if it doesn’t have enough money to cover unexpected costs. Here’s what you need to know about having sufficient emergency savings for your business.
Why should a business keep savings?
Building your own business should be a positive challenge, but things can go wrong for even the most successful firms. Those with enough reserves to stay afloat can weather storms that might sink others. While a good company can win contracts and customers through hard work and careful planning, calamities are unpredictable – COVID-19 serves as a case in point.
If you’ve enough money in a business savings account to ride out a prolonged period of business disruption, you’re in a stronger position than rivals who don’t and can’t. Don’t underestimate the message that being able to keep trading and pay your staff sends out.
Read more:
Earn extra interest on your business savings.
How much should your business have in savings?
Aim to generate a buffer of at least three months’ worth of the working capital you need to run your business. To do this, calculate your average monthly outgoings and aim to save three times that amount.
The money you have put aside should help you cover the following costs:
Essential bills
Staff wages
Stock
Money put aside for corporation tax and VAT (if applicable)
Dividend payments (if applicable)
Any ongoing business insurance – if you’re paying by Direct Debit
Further unexpected costs
Don’t forget to include income you might receive due to income protection or any other cover that could help you if you were unable to trade.
How can you build your business savings reserve?
Many small businesses operate on tight margins, so building a cash reserve may seem unrealistic. It shouldn’t be. The following tips could free up some much-needed money:
Work out a monthly budget and stick to it
Shop around for the best business credit cards and other forms of credit
Check whether you’re using the cheapest energy, mobile phone, broadband and other key suppliers
Apply for any suitable government business grants
Use a business credit card to earn rewards that you can use to offset future costs
Draw up a contract for clients that includes a payment timeframe, and chase those who are late
Create a plan for replenishing your emergency savings in case you need to use them
Read more: How to use a business credit card to collect rewards
Where should you put your business savings?
Always put your work-related savings into an easy-access business savings account, or if you’re set up as a sole trader, you could use a personal savings account. While you may earn more in interest elsewhere, such as in a fixed-term account, the whole point of this type of reserve is so you can draw on it immediately.
Whichever account you choose, remember to check the interest rate every six months and switch to a better-paying alternative if your existing account no longer offers the best return.