How To Create A Financial Safety Net For Your Business
In today’s modern global market, we find ourselves in a turbulent and volatile environment. At one point it can be smooth sailings all the way. And at the next, some unforeseen circumstance might occur that puts us in dire straits. Because of this we need to make sure we have a financial safety net so we can keep our business running when times are lean.
In today’s modern global market, we find ourselves in a turbulent and volatile environment. At one point it can be smooth sailings all the way. And at the next, some unforeseen circumstance might occur that puts us in dire straits. A financial emergency is something that can, and most probably will affect any company at some point. The question for us is are we prepared for when it hits us? Do we have finances set aside to cover any and all unexpected expenses? Do we have an insurance plan in place? Having only one source of income is never a good idea. When creating a plan for financial stability and safety, there are many routes to take and things to consider. Let’s go over some of the key points when it comes to ensuring our financial integrity.
The definition
A financial safety net is no one-factor, one size fits all solution. A singular savings account or a generic insurance policy is just not it. Instead, what it stands for is a portfolio of risk-reducing measures. It is meant to reduce the risks associated with our company and family. Unexpected events of any kind are being covered by these measures and more dire consequences are prevented. It is good to note that we cannot insure against everything. Even if that were to be possible, it certainly would not be feasible. It is up to us to determine the biggest risks our business faces and account for them.
The emergency fund
Also known as a “rainy day” fund. Most of the times it is a pile of money set aside to act as a buffer zone in times of need. Or, some other form of liquid savings we can access easily for when unexpected expenses come up. Professionals suggest having enough in our emergency savings to cover the living and operating expenses for at least six months. It is a very generalized rule of thumb, but also one that fits most cases. Not having an emergency fund will force us to resort to other means of financing. Credit cards, loans or lines of credit are all commonly used but are not necessary with a little bit of planning. There is a commonality for all of these methods and that is interest. To sum it up, we end up paying more than the amount of the original cost. Sure, there are times at which all businesses meet the need for some type of loan. But this not it, as we can be proactive and create an internal, home-made financial buffer zone and avoid all additional costs.
Evaluating risks and opportunities
Impulsive decision making is something no one should be inclined to. Especially when running a business. Some opportunities may look very appealing, some outright too good to be true. But is the risk to reward ratio in our favor? If it goes wrong, what is the potential damage it could cause us? A calculated approach where we weight all the risks against the benefits is absolutely necessary at every step we take. Now, we are not saying to play it safe all the time, just do your due diligence, analytically, calmly, and without bias. It will save everyone a lot of frustration, time, effort, and money.
Getting an early start
The sooner we start the better. There will never be a perfect scenario, in which we have nothing better to do with our finances but put it in savings. And by the time we actually set our minds to it, it might be too late. Setting aside a small portion of our finances each month, will at some point amount to a great deal. No one claims we should devote our entire quarterly budget to our financial safety net and neglect all other business aspects. Small, incremental steps over time are the key. At some, previously calculated point, we will attain a sense of financial safety that will cover most of our unexpected expenses.
Paying off all debts
Getting rid of all of our previous obligations is the foundation on which we can build our financial independence and security. If we do not, it will always be a hindrance, a small, nagging obligation at the back of our mind. And corporately speaking, it is something that will always chip away at our budget that can surely be more optimally utilized. So, getting rid of all of them should be one of the top priorities. Yes, there are businesses that constantly need lines of credit, such industries with seasonal sales. By all means, more power to them. But the problem is that most businesses borrow finances for something else than short-term and temporary cash needs. Sometimes it is for funding distributions, losses, capital expenditures, or simply paying for other loans. All of these and many more are downward spirals that only serve to undermine our point in this article.
Routine and reliable customers
Marketing is arguably one of the most important aspects of doing business. We live in a saturated global market and putting ourselves out there constantly is paramount. We should not leave our marketing department wanting when we reach the busy season or any season at all. If we are constantly not looking to reach new audiences and strengthen relations with the old crowd, our business is not sustainable. New consumers should always be coming in and the current ones should remain happy and content with our services and products.
Creating a financial safety net provides us with important benefits. Ultimately, it comes down to the two most important ones. It protects us when inevitable financial surprises hit. It might not even be something we had any influence over. The important thing is that we have covered for it. Second, it allows us to take risks. Within reason, of course. We have at our disposal a buffer zone, if you will, for learning and experimenting. All of that without running into risks of endangering the bigger picture of our business. Plenty of businesses fail, mostly because of some financial oversight. With these key steps, we can be well on our way for safely making business advancing decisions.
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