How to Set Up Your Small Business War Chest
Written by Angie Mohr
Some businesses call it the "war chest", some, preferring a more gentle moniker, call it a "rainy day fund" or a "cushion". No matter what you call it, it's important and just good business sense for every small business to have some previous profits tucked away for those inevitable times when surprise losses or expenses rear their ugly head and threaten to strain your company's resources. Having business savings set aside has many benefits, including allowing you the freedom to take more calculated risks in your business and being able to take advantage of business opportunities as they arise.
It may be difficult for you to contemplate setting aside funds if you are in the start up or rapid growth phases of your business. It may be enough of a challenge for you to simply meet your current cash requirements and to be able to pay employees and suppliers in a timely manner. "Once I get the business running smoothly, I'll look into that," is a refrain I hear frequently from small business owners all across North America. The problem is, much like your personal finances, putting savings off until later is almost never a good idea. Here are some ideas to get you started towards building your own war chest:
Determine how much you need.
How much would you need to continue to operate your business for 3-6 months if there was a downturn in revenues? The revenue tap can slow to a trickle or stop altogether for many reasons, including natural disaster, obsolescence of your product or service, or increased competition. Each of these potentially business-ending situations requires immediate strategy and changes in operations on your behalf, but, in the interim, your company still needs to operate. A reasonable guideline for how much you should work towards putting aside for these situations is three months of operating expenses. A simple way to determine how much this would be is to pull out your company's prior year financial statements and review the "Expenses" section on the income statement (or profit and loss statement depending on the terminology you use). If there were any significant expenses that you incurred last year that you don't expect to recur, remove them from this analysis. Take the remaining expenses and divide each category by twelve. This will give you the average monthly expense. For example, if you spent $1,475 on office expenses last year, your average monthly expense is $1,475/12 or $123.
Set your savings timeframe.
Calculate how long it will reasonably take you to save your three months' worth of expenses. Let's say that you determine that your total average operating expenses are $2,450 and that you want to have your war chest in place within twenty-four months. That would mean that you would have to put aside $102 per month for the next two years. Review your operating budget and see if you can fit that in. If you are forecasting a monthly profit, you can apportion part of those profits to the war chest. Or, if you are running a "right to the line" budget, analyze whether there are any areas you can reduce current spending by $102. If putting aside this amount is not reasonable, extend your savings timeframe out longer, for example, to thirty-six or forty-eight months. Although getting your war chest together as soon as you can is important, the main goal is simply to start putting money aside. Just as with your personal savings, the sooner you start, the more you'll have. Soon, putting some of your profit aside will become an automatic habit.
Find a suitable "container" for your war chest.
Once you have started accumulating savings, you will need to decide what to do with them. You could simply leave the money in your company's checking account. The downsides of this strategy are that those funds will not earn any interest, and that you may be tempted to spend the money for non-essential purposes (do you really need the newest BlackBerry?). If you decide to invest your savings, you will need to keep in mind the concept of liquidity. This money has been set aside specifically for purposes that cannot be predicted. You don't know when you will need to access these funds. Therefore, it doesn't make any sense to lock the money into a long-term Guaranteed Investment Certificate or other non-accessible investment. Review the investment options that are available to you and choose one that is liquid and still provides some return on your investment, such as a high interest rate savings account.
Putting money aside for difficult times will help you in your business life as much as it does in your personal life. How much can you start saving today?