Keeping a cushion in your account is important for a few reasons. In terms of practical reasons, often businesses just look at the expenses they have month by month. This is good, but what about the long-term expenses? Many businesses will have several of these, for example: maintenance, licence fees and taxes.
These are not unknown expenses, but are generally overlooked because they are long term expenses.
Putting aside funds for your business will assist you in ensuring that you can cover these future expenses, as well as other unexpected expenses that might occur.
Another good reason is for your business health and credit reasons. Showing and maintaining funds which grow in your business, shows credit providers that you are a growing company. As your funds grow, it will illustrate a growth in revenue and a growth in your business.
This in turn will make other financial options available to you such as overdrafts, improving credit benefits, funding options and more.
The question is, how much to save every month?
Well as a simple guide,
- Take all your long term expenses (licences, maintains, insurance, tax etc) and work out the yearly cost of all these expenses
- Divide by 12 months, to get how much the monthly amount will be
- Estimate your unexpected cost. In general, things that could happen, and the associated cost. This is a best guess process, or a just feeling cost.
Work this out as a percent of your monthly deposits, then add a buffer which will make you comfortable.
It is good to be disciplined with this payment. Let’s say you calculate it to be around 5% of your monthly deposits. To keep on track, you should treat yourself as a supplier. Create another account and transfer this 5% on a scheduled day and time.