Use extra cash made in festive season for emergency fund
Seasonal small and medium enterprises (SMEs) are advised to not spend extra cash all at once. Save a portion of festive season profits for an emergency fund.
The festive season is a time when many SMEs reap the rewards of increased spending.
Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), says a major risk faced by many businesses is their vulnerability to unexpected financially draining mishaps, such as a big client loss, a lawsuit or any accident that is not covered by insurance.
“Few SME owners have an emergency fund to deal with unforeseen events,” he says.
“This is understandable, since a growing business tends to require a lot of cash to move forward.
“Another likely reason is that most SME owners are more focused on the immediate practicalities of building their business, rather than vague risk assessments and planning.
“By nature, entrepreneurs tend to be chronically optimistic about the future good luck of their business,” adds Lang.
“However, considering South Africa’s under-performing economy and rising inflation, it is essential all SME owners save for a rainy day.
Those that have boosted seasonal business have an advantage and should capitalise by putting aside a portion of their seasonal profits,” he says. It is key to set a goal. “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 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.
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, Lang 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 interest to accrue.