5 min read
How to build a business safety net
Sustainable and ongoing income is the key to continued business success. When revenue stops coming in, however, is your enterprise prepared to bridge the gap?
Cash flow management needs to be about more than just balancing your incoming and outgoing revenue. Without a healthy reserve, many businesses would be forced to permanently close the doors if their income were to dry up.
In fact, more than half (52 per cent) of small enterprises have a financial safety net of less than AU$18,000, according to a recent study conducted by UK market research organisation YouGov on behalf of Simply Business.
With the average monthly cost of running a small enterprise estimated at more than $35,000, this is a major shortfall that could see many businesses struggling to stay afloat for more than 2 weeks if cash flow ceases.
Even more troubling, three in ten organisations admitted to having less than $1,000 saved for emergencies, with around 20 per cent having no reserve at all.
There are many reasons your business’s income could be disrupted, including natural disasters, building repairs and staffing shortages. Protecting your finances from these unfortunate events requires foresight and a thorough business plan.
Fortunately, building up a financial safety net doesn’t need to be difficult. There are a few simple measures you can put in place to ensure that even if you are forced to temporarily close the doors, your business can recover.
Take out insurance
Comprehensive business insurance can be the most vital protection you put in place when preparing for potential cash flow interruptions. Taking out a policy that covers for income protection and business repairs will ensure you are still able to pay the bills even when the company is not actively operating.
While most business owners understand the importance of insurance, it is crucial that you carefully review your policy when making changes to your enterprise. If you take on new staff or expand operations into a new market, you could discover gaps in your coverage.
You should review your insurance at least every year, to avoid being surprised with rejected claims and lower than expected payouts.
Create recurring revenue
Recurring revenue is essentially the portion of your income that is regular, ongoing and sustainable. Having a significant amount of your cash flow originating from these streams can help you prepare for business interruptions and minimise any damage.
This is because it’s easier to forecast when your next payments are coming in and to resume this income if an unforeseen event causes disruptions. With recurring revenue, you may also be in a better position to negotiate with your suppliers as you can demonstrate your business’s ability to earn a sustainable income. This can help ensure you are able to delay your own debts while non-operational, giving you room to concentrate on business recovery.
Investing in a recurring revenue model can provide benefits to your business and to your customers. In particular, solutions such as direct debit enable you to pause clients’ payments during times when your doors are closed, and easily resume payments once the interruption has concluded.
Boost your business savings
Having a healthy bank account is a crucial factor in bridging business disruptions. With a significant amount of capital under your belt, you can easily continue to cover your bills even if income temporarily dries up.
While it can be difficult to save, it is recommended that you have at least one month’s running costs set aside to cover potential revenue gaps. Building this kind of reserve requires plenty of discipline.
A few simple ways to boost your business savings include cutting outgoing costs, encouraging customers to pay invoices on time and lowering the repayments on low-interest debts. With these measures in place, it should be simple to allocate the extra funds toward your safety net.