Does Your Business Have Backup Cash? How to Build a Business Emergency Fund

One of the most common mistakes business owners make is not keeping an emergency fund for the business.

Usually, all the profit is either put back into the business or spent. That is not wrong in itself. But without an emergency fund, a single bad month in the market or one unexpected problem can be enough to force a business to shut down.

What is the real problem?

Imagine this: a big machine in your business suddenly breaks down, and the repair costs a lot. If you do not have the money at that moment, what will you do? You will have to borrow at high interest to repair it or buy a new one.

For a small amount, you can perhaps ask someone for help. But what if you need a large amount? Nobody may be able to give it to you on short notice. These are exactly the moments when an emergency fund protects your business, and keeps you from falling into bad debt.

Other common emergencies include a sudden drop in sales, a large customer delaying payment, a supplier demanding cash upfront, a medical emergency for the owner, or repairs to the shop.

How much emergency fund does a business need?

Add up what it costs to keep your business running every month: shop rent, staff salaries, electricity bills, EMIs, and other fixed expenses. Keep enough money for at least 3 to 6 months of these costs. If you can, aim for 6 months, which is much safer.

For example, if your fixed monthly costs are ₹60,000, a 3-month fund is ₹1,80,000 and a 6-month fund is ₹3,60,000.

How to build a business emergency fund

Setting aside such a large amount at once is hard for anyone. So build it slowly, the same way many people pay into a chit fund every month.

1. Fix a target. Calculate 3 to 6 months of fixed expenses.
2. Set aside 5% to 10% of your profits. Move it daily, weekly, or monthly, like a regular chit payment you never skip.
3. Use a separate account. Keep it apart from your daily business account so it is not spent by mistake. Our guide on separating business and personal accounts explains why separate accounts make money easier to track.
4. Keep going until you reach the target. Use your records of daily sales, expenses, and profit to decide how much you can set aside each month.

The most important rule: keep it safe and easy to withdraw

Never put this emergency money in the stock market in the hope of higher returns, and never lend it to anyone. It must be available within a short time when an emergency hits.

Keep it in a savings account or another option you can withdraw from quickly, such as a liquid mutual fund or a sweep-in fixed deposit. Check the withdrawal time and any charges before you choose.

If you ever use the emergency fund for an unexpected expense, rebuild it as soon as the business is back on track.

The bottom line

Without proper planning, even a small problem can put your business at risk. Follow this one simple rule, and your business can keep running through almost any crisis.

This article provides general business education, not financial, legal, tax, or investment advice. Loan terms differ between lenders. For decisions specific to your business, speak with a qualified accountant or financial adviser.

Frequently asked questions

What is a business emergency fund?

A business emergency fund is backup cash set aside only for unexpected problems, such as a machine breakdown, a sudden fall in sales, or a delayed customer payment. It keeps the business running without having to borrow at high interest.

How much emergency fund should a small business keep?

Keep at least 3 to 6 months of fixed monthly business expenses, including rent, salaries, electricity bills, and EMIs. Six months is safer. For example, if fixed costs are ₹60,000 a month, a 6-month fund is ₹3,60,000.

How can a small business build an emergency fund?

Set aside 5% to 10% of your profits regularly, daily, weekly, or monthly, into a separate account, the same way you would pay a monthly chit. Continue until you reach your 3 to 6 month target.

Where should a business keep its emergency fund?

Keep it somewhere safe that you can withdraw from quickly, such as a savings account, a sweep-in fixed deposit, or a liquid mutual fund. Do not invest it in the stock market or lend it to anyone.

What should I do after using the emergency fund?

Rebuild it as soon as the business recovers, by setting aside a share of profits again until you are back to your 3 to 6 month target.