Emergency Funding

[KristineS]

How much money do you think a business owner should have on hand? I've read some advice that says you should have enough saved to cover six months worth of bills. Other sources have said three months.

What sort of emergency fund do you all have, and does it make you feel more secure?

[vangogh]

6 months sounds like a good plan. Maybe one day I'll even have that.

I can't say I really have an emergency fund. There's not a lot of costs associated with my business. Some, but not a lot. Most of my costs lean toward the personal like food and rent.

[SteveC]

Our business has a source of funds to cover any unforeseen circumstances and this probably runs to six to twelve month … we tend as a business to add to it each month when we have excessive funds and then draw from it only when needed or when we wish to expand or try something new.

And I would say having three months is a good amount of money for an emergency fund…

[Steve B]

I'm guessing what you are asking is more about how much money you have saved in order to pay your personal bills while you are waiting for your business to start contributing enough to live on. Six months would be a minimum in most cases, but, of course it depends. If you were still living at home with M&D and you know they would bail you out if needed, then it would be less. It also depends on the industry. Some of them just take a while in order to build name recognition etc.

[Evan]

I'm assuming you're talking about the business owner personally, and not the business.

Realistically, 3 months is probably the most appropriate for most people. Six months is too much, especially to have in fluid investments (savings/money market accounts). It also depends on what you use your "emergency" fund for. Most people talk about it, but never really define it.

Is it an emergency if you car breaks down and you need to fix it in order to maintain your day job? Is it an emergency if your business isn't generating as much cash flows as normal? Is it an emergency if become paralyzed and unable to operate your business.

[orion_joel]

The primary thing's that i have often seen in reference to this type of fund is more so to do with individual owner of a business, holding enough savings to cover their expenses for the first X months the business operates for. The most common estimates i have seen are usually 6 or 12 months.

The main reason most suggest this is on the basis that you generally won't be able to afford to take any sort of draw or salary from the company in this initial stage of growth, as you may be reinvesting all the profit. To some extent i think that this is maybe a good point however as mentioned it does depend a lot on the business and just what your expenses are. For example as it stands right now, i am living with my parents, as such if i cut back to absolute bare essentials. Then i currently have enough savings that generate sufficient interest income per month to not eat into the principle. It would mean that i would more then likely not leave the house, but i could survive indefinitely. If i was to increase my savings by about 5 or 6 times i no longer need to work at all and could comfortably survive on the investment income, to allow me to do whatever business wise i wanted.

[KristineS]

Evan and Steve B, yeah, that's primarily what I was asking.

I still toy with the idea of going it on my own. I just want to have a realistic picture of what I need to have on hand and need to do so as not to crash and burn. I just bought this house, I'd like to hang on to it.

So, it sounds like six months worth of funds to meet bills is pretty standard. Good to know.

[orion_joel]

I agree 6 months i think is pretty standard, the one thing that i would like to add is don't forget capital for the business. While there may be possible to find some sources that will provide some capital for a business, you also need to think of it from your own point of view. In some businesses you may be able to spend very little to get started, but dont leave yourself short for on going expenses in the first few months while you are still building the business especially thing's like marketing which you may initially spend more on then the income it generates.

It really depends on the business and the plan you have in place for it just how much you may need.

[KristineS]

Good point, Joel. Before I did anything like this I would sit down and make as complete a financial plan as possible and try to list every potential expense. I guess you really have to plan for two needs for your cash, getting the business started and what that will require, and supporting your personal needs, house payment, food, etc.

[Coach Morse]

Cash Flow is what drives a business. If you project a cash flow that will pay the business expenses and generate an adequate income to cover your personal needs, then having cash in reserve is not as important.

If however, you project the business will not generate enough cash to meet those financial needs, then you'll want to build up an adequate reserve before starting the business. How many months worth you'll need really depends on how long your projections say it will take for your business to generate positive cash flow, then add a buffer of 3 to 6 months to cover any unforseen expenses or miscalculations.