Setting Up a Business Emergency Fund

Eric wants to know how to set up a business emergency fund. Dave explains.

QUESTION: Eric in Chicago wants to know how to set up a business emergency fund. Dave explains.

ANSWER: In business, we would name it differently. We would call it retained earnings, but it’s still the same thing. One of the purposes is for an emergency fund. One of the purposes would be to expand the business and launch a new product line. Another purpose might be to take advantage of some opportunities in the marketplace, meaning you could buy out a competitor or buy up some extra inventory at a deal or something like that.

Basically what we have are cash needs in the business to keep it open and to keep it moving forward. Really, when you say it that way and then you put on top of that that Dave Ramsey doesn’t borrow money, that starts to be a pretty big account then. I’m okay with the goal—and I wouldn’t be in panic mode like I would in personal finance—being to have six months of operating expenses as your retained earnings for future growth, for taking advantage of opportunities, to not have to borrow money, and to cover a rainy day as well. That’s a lot of cash, but you’re your own credit line, too. There’s no line of credit here.

That’s my goal around here. We’re not there right now—our organization is not. We’ve got a lot of cash, but there’s a lot of expenses around here. We’re not quite at that 50%, and I don’t know if we’ll ever get there as fast as we’re growing. As soon as we get more money saved, we’ve got more expenses, so we have to start again. It’s this constant thing—the more hurried I go, the more behind I get type of stuff. You’re going to face that.

That’s how I would do it, and you just call it retained earnings and, in business, we put it in a little different light than we do when we’re dealing with personal finance. That one account serves—one big chunk of liquidity, that big pile of cash—serves for several things to avoid debt and a lot of other things.