Keeping Cash Strong

Andrew has 2 issues to tackle in his small business, and wants to know where to fit emergency fund savings in there.

QUESTION: Andrew asks how much of an emergency fund a small business should keep to cover loss of clients vs. paying off debt.

ANSWER: Your overall goal could be the same as a standard emergency fund. If you have 6 months of business expenses set aside in retained earnings, you can cash flow and cover any growth issues or to buy a competitor out at pennies on the dollar, or for emergency money. I recommend heavy cash position because I don’t borrow money. If you’re getting out of business debt and building up an emergency fund, take your net profit and come up with a formula to get your answer. Once you are pulling enough from the business to eat and service your bills, then apply the vast majority of your net profit and surplus toward debt.