Why every business needs an emergency fund

A business emergency fund is a financial safety net designed to keep your business operational during unexpected disruptions. This fund can be crucial for covering expenses that could jeopardise your business’s ability to function, such as paying suppliers, staff, rent or utility bills if your income suddenly drops.

Cash flow in businesses can be unpredictable, with periods of strong sales, followed by slower income phases. Without a financial buffer, even short-term issues can threaten your business’s stability. Therefore, it’s important to have a reserve of funds specifically for emergencies.

Having a business emergency fund isn’t just about surviving a crisis. It can also help manage cash flow and planning for the future. By maintaining a dedicated fund, you can place yourself in a better position to have the resources to keep your business running smoothly, even when things get tough.

Why is a business emergency fund important?

A business emergency fund is not just a safety net, it can be a practical tool that helps your business handle real-world problems. Running a business means facing unexpected challenges. Sometimes, these challenges can threaten your ability to keep your business open or pay your staff. It’s not just for big disasters but also for smaller problems like a sudden drop in sales or an unexpected bill.

Many business owners think they can rely on business loans or credit cards if something goes wrong. However, getting a loan can take time and using business credit cards can be expensive. Having your own emergency fund can help you act quickly and avoid extra debt. It can also give you peace of mind, knowing you have a safety net if you need it.

Building an emergency fund can demonstrate that you’re planning for the future and taking your business seriously. It can also make your business more attractive to banks and investors, because it shows you’re well prepared.

By understanding the risks and preparing for them, your business has the best chance to succeed, no matter what comes your way.

Covering unexpected expenses

If a supplier suddenly raises prices or a natural disaster damages your premises, having money set aside means you can respond quickly potentially without needing to borrow or cut corners. Even smaller issues like an unexpected legal bill can be managed if you have funds ready.

Managing payroll during disruptions

One of the biggest challenges for any business is making sure staff are paid on time, even when income is disrupted. An emergency fund can help you meet payroll obligations and keep your team’s trust.

Handling tax obligations

Having an emergency fund can help you stay on top of tax payments and avoid penalties that could hurt your business in the long run.

Addressing equipment failure or repairs

Equipment breakdowns can stop your business in its tracks. With an emergency fund, repairing or replacing the equipment straight away, reducing downtime, may be easier.

Discover how you can finance new equipment by learning more about NAB Equipment Finance.

Supporting growth opportunities

Tough times can also bring new opportunities, like buying discounted stock or expanding when competitors are struggling. With a financial buffer, you can take advantage of these moments.

If you need flexible funding for growth, you might consider NAB business credit cards.

Managing cash flow gaps

Cash flow gaps are common, especially if clients pay late or your business has seasonal fluctuations. An emergency fund can help cover expenses during these periods, keeping your business running smoothly.

For extra support managing cash flow, you can also explore business overdrafts.

By preparing for these situations, your business becomes more resilient and is ready for any unexpected surprises.

How much should you save in a business emergency fund?

The right amount to keep in your business emergency fund depends on your unique situation. There’s no single answer that fits every business, but there are some guidelines that can help you decide. Start by thinking about your regular expenses, such as rent, wages, utilities and supplier payments. If your business had no income for a few months, how much money would you need to keep things running?

The Australian Government’s website Moneysmart suggests saving enough to cover at least three to six months of your operating costs. This gives you a buffer to handle unexpected events without having to rush into loans or make tough cuts. However, some businesses may need more, especially if they are in industries with higher risks or unpredictable cash flow.

You should also consider factors like the size of your business, how steady your income is and whether your costs are mostly fixed or can change from month to month. For example, a business with lots of regular bills and not much savings should aim for a bigger emergency fund.

If you want to explore different ways to save and manage your business funds, you can learn about NAB’s business savings and deposit accounts.

How to build a business emergency fund

Building a business emergency fund doesn’t have to be overwhelming, even if your business is just starting out.

Start small and grow consistently

One option is to build a business emergency fund with small, regular contributions. For example, you might decide to set aside a fixed percentage of your revenue each month. Over time, these small amounts can add up and provide a solid safety net for your business.

Identify cost saving opportunities

Another helpful step is to review your current expenses and look for areas where you can save money. Cutting back on non-essential spending allows you to redirect those funds into your emergency savings.

Allocate a percentage of profits

When your business has a good month or receives extra profits, consider putting a portion of that money into your emergency fund.

Consistency is important. By making saving a regular habit, you’ll gradually build up your fund without putting too much strain on your day-to-day operations.

Taking these steps now means you’ll be better prepared for whatever challenges your business might face in the future.

If you want some handy tips on how to manage your finances, you can check out our collection of resources for managing business finances.

Where to keep your business emergency fund

Once you’ve started building your business emergency fund, it’s important to keep it somewhere safe and accessible.

High interest savings accounts

The best place is usually a high-interest savings account, which lets your money grow while still being easy to access if you need it quickly. This way, you can earn some interest on your savings without locking it away.

Term deposits

If your business can afford to have some of the money less accessible, you might also consider term deposits. These accounts often offer higher interest rates but you won’t be able to withdraw the money straight away without a reduction to the interest earned. This can be a good option for funds you’re less likely to need urgently.

Choose both

Choosing the right place for your emergency fund depends on how much flexibility your business needs. Some businesses prefer to split their savings between a high-interest account and a term deposit, so they have both quick access and better returns.

To compare different options and find the best fit for your business, consider exploring NAB’s business savings and deposit accounts.

By keeping your emergency fund in the right place, you can ensure it’s ready to help your business whenever you need it.