3 Key Tips To Start Your Rainy Day Fund

I strongly encourage you to set up a rainy day fund, or a “profit war chest”.

We had a client in May of this year who sent us a Thank You note, saying that a couple of years ago, we recommended that they start a separate bank account called the profit war chest, and they said, “We didn’t really need to use it since then, but this year has been a bit of an interesting one, and there’s been a few rainy days. Thank you so much for your recommendation – it’s saved our business and meant that we didn’t have to make anyone redundant.”

As an accountant, that’s pretty fulfilling. So if you don’t already have a rainy day fund, then I strongly suggest you set one up.

The key here is to ideally have a separate bank account in your business name, at a separate bank, so that you’re not looking at this account every time you log into your transactional banking accounts. Now that keeps it out of your mind, so you ignore it and you don’t feel like you’ve got 20, 30, 50 or $100,000 sitting aside just for that rainy day. Hopefully it’s out of sight out of mind, but you do know at the end of the day, you can access it if you need it.

A lot of business owners I’ve seen are actually quite cashed up as a result of the stimulus measures. So if you don’t have something like this in place, then start with any excess cash that’s lying around in the business accounts. So let’s say you’ve received $80,000 of cashflow boost, and you haven’t needed a cent of that, then there’s your rainy day fund – or at least the start of it.

Even clients with JobKeeper; if you’re eligible in any of the first few months, you’re eligible for the full six month initial period. So what that means is, if we had a client who took a little bit of a revenue hit in March or in April this year, and then they’ve picked up to the same sales or more, then they’ve probably got a lot of JobKeeper lying around that the business didn’t really need to survive – which is a great thing. So please set aside that excess cash for the purpose that it was given to you for, which was actually to look after the business in a downturn – that’s essentially the definition of a rainy day fund.

I also recommend you contribute regularly to your rainy day fund. For you, it could be a couple of hundred dollars a week, or it could be $1,000 a week. Whatever that number is for you, it needs to continually build that rainy day fund up. You’ll get to the point where you won’t notice the cashflow drain in your working accounts, and then all of a sudden months later, you log into your rainy day fund and go, “Wow, that is an impressive balance there.”

The recommendation is to aim for three months worth of your business operating expenses, and also three months of profit that you want to take out as a business owner for your efforts, so that you’ve got three months of complete cash flow, in case anything hit the fan again.

Watch the full webinar at https://insp.red/christmascashflowwebinar