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Put away cash in an emergency fund for unforeseen events – advice to SMEs

Put away cash in an emergency fund for unforeseen events – advice to SMEs

18 December 2018: The festive season is a time when many seasonal small and medium enterprises (SMEs) reap the rewards of increased consumer spending, such as additional sales and accommodation bookings from the influx of holiday makers and festive season shoppers. This spike in earnings offers the ideal opportunity for these businesses to save some of the extra money that they make for an emergency fund.

This is according to Gerschwyne van Wyk, country manager at Business Partners International, who says that a major risk faced by many businesses is their vulnerability to an unexpected financially-draining mishap such as a big client loss, a lawsuit, or any accident that is not covered by insurance. “Despite this, few SME owners have an emergency fund in place to deal with such unforeseen events.”

“This is understandable since a growing businesses tends to require a lot of cash to move forward. Another likely reason for this is because most SME owners are more focused on the immediate practicalities of building their business, rather than on vague risk assessments and planning. By nature, entrepreneurs also tend to be chronically optimistic about the future good luck of their business,” adds van Wyk.

“However, it is essential that all SME owners save for a rainy day. Those that have boosted seasonal business have an advantage and should capitalise on this by putting aside a portion of their seasonal profits,” he explains.

When saving towards an emergency fund, it is key to set a goal, van Wyk points out. “A good rule of thumb is to have three to six months’ worth of overheads set aside, but even just one month’s expenses are better than nothing.”

The next step is to decide what constitutes an emergency, he says. “If an emergency fund can be dipped into every time you want to avoid an awkward phone call to the landlord to say that the rent will be slightly late this month, it won’t last long. A true emergency is one that threatens the survival of the business.”

With this in mind, thinking through and writing down a list of possible emergencies that would justify the use of the fund is a good risk-assessment exercise for any business, suggests van Wyk.

Finally, some thought needs to be given to where an emergency fund should be kept, he says. “Gambling with the money on the stock exchange defeats the purpose. A money-market account is a better option, but it may be worth considering an account where the funds aren’t too easily accessible, so there’s no temptation to dip into it on a whim. On the other hand, it should not be so inaccessible that you cannot access it fairly soon when an emergency does strike.”

As such, van Wyk recommends a set of notice deposit accounts with varying notice periods so that a limited amount can be accessed immediately, and some a little later, which allows for some interest to accrue while the money, hopefully, will not be used any time soon.

“However, ultimately the will on the part of the business owner to attain these savings is critically important. The cash demands in a business are so constant that any vague or half-hearted attempt to establish an emergency fund will fail. It will have to be a conscious and disciplined effort by the business owner,” van Wyk concludes.


 

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