In personal financial planning, it is recommended that individuials set aside an emergency fund of cash equal to 6 months of living expenses in case a job loss or other interuption of income occurs.
This is great advice not only for individuals, but for business owners as well. I have always felt most comfortable in business with 3 months of operating expenses in reserve and another month or 2 available on some sort of credit i.e.-credit lines, credit cards, etc. These reserves can allow the business to weather any economic storm without reducing the owners personal compensation while he/she rides out the tough times. If the reserves had not been set in place, and the business owner is already managing the businesses expenses aggressively, the only remaining place to cut is owner compensation. For business owners, this should always be a last resort.
In my businesses, the chances of me losing 100% of monthly revenue is very slim. But in these economic times, it is quite possible to have a 30% or more sales dip in one or several months. In those months I thankful I have my reserves in place and that I put a little bit away for a rainy day.
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1 comment:
Excellent advice, what if I already started out behind and have only occasionally paid myself? How do I create this?
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