It’s one thing to have enough money to cover daily operating expenses for your small business. It’s another to have a financial cushion that can help you weather economic storms, both expected and unexpected.
What is a Financial Cushion?
A financial cushion consists of the savings you keep in order to be able to cover emergency costs, survive economic hard times, and cover unexpected costs for your business. A financial cushion provides financial security and prevents you from having to go into debt.
Benefits of a Financial Cushion for Your Business
Here are the main benefits of having a financial cushion:
- Having a financial cushion provides you with the security and peace of mind of knowing your business can survive a financial hit.
- You will be able to cover large, unexpected business expenses without having to take out a loan and going into debt.
- You will be less tempted to use your personal funds and assets to keep your business afloat during hard times.
- It can give you the ability to outlast your competitors during economic downturns.
- It provides you with more liquid assets you can put to use when you need them the most.
How Much Money Should Go to My Financial Cushion?
Having three to six months worth of operating expenses in your financial cushion is a good rule of thumb to follow. This should give you a sufficient buffer to cover immediate emergencies and enough breathing room to figure out your next steps in most cases.
This may seem like a lot, and you may be inclined to use that money to expand your business instead. This is understandable, but consider how many small businesses went under in the early stages of the COVID-19 pandemic, for example.
An emergency situation like this is exactly why you need a financial cushion.
Tips for Building a Financial Cushion
Many entrepreneurs struggle to build up a financial cushion for their small businesses, especially when first starting. Let’s look at some tips you can use to ensure you always have a little cash tucked away for a rainy day.
1. Switch to Paperless
Switching to a paperless office system can save you a lot of money, which you can then funnel into a savings account. How?
When you go paperless, you:
- Spend less money on office supplies, such as paper, ink, postage, and printer equipment.
- Reduce the time it takes to file, organize, and search for documents, which leaves your employees free for more productive tasks.
- Don’t need as much storage space, meaning you can lease smaller and cheaper office space for you and your workers.
On top of that, switching to a paperless office system ensures that you operate as sustainably as possible. Not only can this be a great marketing boost for your brand, but it can also potentially let you take advantage of certain tax breaks.
2. Practice Good Invoicing
It’s tempting to allow your best customers plenty of time to get back to you when you send them an invoice.
Unfortunately, leaving outstanding invoices for too long means you don’t get to use that money for your business expenses, debt repayments, and other needs.
Instead, you should stick to good invoicing practices, like:
- Having a firm deadline for every invoiced client or customer.
- Collecting invoice payments on time (and applying interest for late payments).
- Cutting out clients that are repeatedly late, that don’t respond to invoice requests, or that cause credit card chargebacks.
This can take some time to master, but it will make a big difference when saving up and will improve your cash flow.
RELATED: 5 Accounts Receivable Management Tips to Improve Liquidity.
3. Transfer a Balance to a Better Credit Card
If you use business credit cards for operating expenses, consider transferring their balances to a card with an introductory 0% APR period. Why is this beneficial?
Say you have $2,000 in credit card debt with a 17% APR. That means you’ll have to pay much more than $2,000 if you just make minimum monthly payments. But if you transfer the money to a 0% APR card, you can only pay down the principal (provided you complete paying it off before the introductory period expires), saving you money on the interest.
Alternatively, consider opting for a business tradeline instead of using a credit card.
A business tradeline is a form of credit extended to a business by its vendors or suppliers. In this agreement, the business receives goods or services while agreeing to pay for them at a later date. Since many vendors/suppliers don’t charge any interest if you pay your bills within the payment deadline, a tradeline may be a considerably cheaper option than a credit card and leave you with more money to save.
4. Use a Cash Back Credit Card
One simple way to generate extra cash for your business is using a cash back credit card. These credit cards pay you back a percentage of the money you spend on business-related expenses, such as office supplies, gas, business trip accommodation, vendor services, etc.
You can then use that cash to cover other expenses, pay off your credit card balance, or increase your savings nest. Considering how much money you spend on your business, cash back credit cards can lead to huge savings over time!
5. Set Aside Money From Sales
As your business makes money, you should regularly set aside some of that cash and put it into your business coffers. But how much is enough?
In the earliest days of your business’s lifespan, it might only be possible to set aside 1% of all your sales revenue. But as your business grows and you make more sales, you can consider upping this to 3%, then 5%, and then possibly even 10% of your monthly revenue.
The more money you set aside and save, the better prepared you’ll be for the inevitable business emergency, like a recession or the breakdown of an expensive piece of equipment. When disaster strikes but you have enough money set aside from sales, you can rebuild without having to declare bankruptcy or downsizing significantly.
6. Use a Fee-Free (or Low-Fee) Bank
Let’s face it; recurring banking fees can seriously eat into your bottom line over time. If you want to save money and maximize the size of your financial cushion, you should try to find a no-fee or low-fee bank.
A bank with sign-up fees, excessive late fees, and other types of fees can put a financial strain on your small business. If your current bank isn’t giving you what you need, don’t hesitate to jump ship and sign up with another bank instead.
Always Have a Backup Funding Solution
You should consider lining up a backup funding solution you can use when times are tough. Even if you have a financial cushion of several thousand dollars, you might need more to cover unexpected business expenses or pay debts.
That’s where funding solutions like Gravity Capital come in. Gravity Capital allows you to get the funding you need by working with your credit card processing system. Simply put, you can get quick funding, have money in your account the next business day, and have worry-free repayments.
With Gravity Capital, a percentage of all your daily credit card sales is applied to the funding balance as you make money. This is just one example of how you can have a backup way to finance your business operations in an emergency.
Wrap Up
As you see, you can always save a bit of cash and ensure you have a financial cushion to fall back on when necessary. By practicing the above strategies, you are likely to have money when you need it most and avoid having to take out an expensive or predatory loan to save your business from sinking.
