Today's topic is all about saving and why it needs to be a priority in your personal life as well as in your business. We'll also dive into some different savings accounts I recommend having and why.

The Importance of Business Savings

When you have a business, there are a lot of variables and many reasons to prioritize savings. Your business is not only your livelihood but also a critical part of the livelihood of your family and employees. The COVID-19 pandemic brought to light the necessity of having a financial cushion for the toughest times. Many businesses unfortunately went under due to a lack of sufficient savings during the shutdowns.

In business, some factors are within your control, but many are not (which is why it’s so crucial to prepare!). It’s not if an uncontrollable will affect your cash, it’s WHEN.

Cash flow issues are one of the biggest reasons businesses fail, even those that have strong market demand and excellent products or services. Without sufficient cash flow, even the most promising businesses can face significant hurdles. The pandemic highlighted this stark reality: businesses with robust savings could weather the storm, while those without adequate financial buffers struggled or failed.

My goal today is not to scare you but to emphasize the critical role of savings in business survival and success. Now, let’s dive into the types of business savings accounts I recommend.

Four Key Types of Business Savings Accounts:

Tax Savings

Taxes are inevitable, even during difficult times. To avoid the stress of a huge tax bill, save 25-30% of your net profit each month for federal, state, and local taxes. This practice ensures you have the funds to pay your estimated taxes throughout the year and cover any additional amounts due when you file. Consult with your tax or bookkeeping professional to determine the best percentage based on your specific situation. If you end up with extra money after filing taxes, keep it in your tax savings account as an additional cushion.

Emergency Savings

Emergency savings are essential for covering core operational funds during tough times. Aim to save three to six months of operational expenses, which include keeping the lights on and paying yourself and your employees. If you have significant debt, start with three months of savings while focusing on debt repayment, then build up to six months.

Reinvestment or General Savings

This account is for investing in your business, whether it’s buying new equipment or hiring a consultant. While not a priority over tax or emergency savings, reinvestment savings are crucial for future growth. Once your emergency fund is in place and you have no outstanding debt, allocate funds to this account to prepare for opportunities or unexpected needs.

Operational Cushion

This isn’t a separate savings account but rather a buffer in your operational checking account. Aim to have one to two months of operational expenses available to avoid dipping to zero or close to zero throughout the month. This cushion ensures you can pay bills as needed and provides an additional layer of security before tapping into your emergency fund.

Tips for Successful Business Savings

For tax and emergency savings, consider having separate accounts at a different bank to reduce the temptation to use these funds for daily operations. Knowing your behaviors and setting yourself up for success by avoiding temptations can make a significant difference. An accountability partner, whether it’s a business partner, spouse, or friend, can also help keep you on track.

If you deplete your emergency fund, prioritize rebuilding it immediately. Always save for taxes based on net profit and, if needed, use funds from your reinvestment savings to cover emergencies.

Personal Savings: Equally Important

Personal savings are just as crucial as business savings. Aim to save three to six months of personal expenses to cover your bills during an emergency. If your business is your sole income source, consider extending your personal emergency fund to eight or nine months.

By keeping an accurate monthly budget, you can track your financial margin and allocate funds appropriately to different savings accounts. Remember, saving diligently ensures not only your survival during tough times but also sets the foundation for thriving in both your personal and business life.

Prioritizing savings in both your business and personal life is not just a safety net but a crucial step towards sustained success and financial stability. Start building your savings today to secure a better tomorrow for yourself, your family, and your business.