Every business can benefit from having some savings set aside. But just how large should this reserve fund be?
Ideally at least three to six months of revenue – this is what most finance experts agree. Of course, you can save up much more than this. It all depends on how you plan to put your savings to use.
Why does your business need savings?
The most popular reason for setting aside savings is to help pay for unexpected costs such as emergency repairs, lawsuits or periods of downtime due to disaster. Having savings set aside can prevent you having to borrow money. By reducing the need to take out debt, you’ll save money in the long run by not having to pay interest fees.
Of course, savings and loans aren’t the only way to pay for unexpected costs – insurance schemes such as liability insurance for small business can pay for certain disasters. Some insurers are willing to pay out hundreds of thousands, which could be a lot more than you can reasonably save up. However, even if you do have insurance in place, it’s often worth still setting aside some savings to pay for insurance deductibles.
Unexpected costs and insurance deductibles aren’t the only reasons to set aside savings. Setting aside savings could also allow you to buy certain equipment in cash instead of relying on loans. Alternatively, you could save up money to give out to employees at the end of the year as a bonus. You could even use it to pay for office renovations or to upgrade your website.
In most cases, it’s good to set a clear savings goal or purpose. This can stop you continuously dipping into your savings.
Where should you put your savings?
It’s best to keep your savings in a business savings account. Some of these have good interest rates and tax advantages, allowing you to build interest without having to pay too much tax on these extra earnings.
You should shop around to find the best interest rates. Be wary that certain savings accounts may only pay you interest if you’re able to meet certain requirements such as maintaining a minimum balance or contributing a certain amount each month. Make sure that you’re able to meet these requirements before choosing such an account.
You could choose to contribute money monthly or weekly. These savings contributions could be automated. If your savings are for unexpected costs, you could plan to stop once you’ve saved up three months’ worth of revenue – just make sure to start contributing money against once you dip into your savings. If you’re saving for a specific goal such as buying new equipment, keep contributing money until you reach your target amount.
If you’ve got a long-term savings goal, you could consider investing your money somewhere other than a bank account. This could include buying cryptocurrency, buying stocks or handing out peer-to-peer loans. Such investment strategies are riskier than using a savings account, however there could be a chance of growing your savings much more considerably – make sure to do your research and never invest more than you’re willing to lose.
