JOHANNESBURG - Small and medium businesses are particularly vulnerable to financially-draining mishap such as losing a big client, a lawsuit, or any accident that is not covered by insurance.
Yet despite this, very few have an emergency fund in place to deal with such because most are focused on the immediate practicalities of building their business, rather than on vague risk assessments and planning. Entrepreneurs also tend to be chronically optimistic about the future good luck of their business.
However, considering South Africa’s underperforming economy and rising consumer price inflation, it is essential that all businesses save for the rainy day.
The festive season is often a great time to kick-start such an emergency fund because many seasonal businesses tend to experience increased consumer spending driven by the influx of holiday makers and shoppers.
This spike in earnings offers the ideal opportunity for businesses to save some of the extra money that they make for an emergency fund.
When saving towards the fund, it is vital to set a goal. The 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. If the fund can be dipped into to avoid an awkward phone call to the landlord to say that the rent will be slightly late this month, it will not last long. A true emergency is one that threatens the survival of the business.
Thinking through and compiling a list of possible emergencies that would justify the use of the fund is therefore a good risk-assessment exercise.
Thought also needs to be given to where an emergency fund should be kept. 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 are not too easily accessible, so there is no temptation to dip into it on a whim. On the other hand, it should not be so inaccessible that you cannot have it fairly soon when an emergency does strike.
Open 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.
Ultimately, however, the will of the business 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.
Ben Bierman is a managing director at Business Partners Limited.