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The Importance of a Safety Net and How Small Business Owners Can Create One

Contributed Article by Nicola Reid 

 

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Having a financial safety net is imperative for all businesses regardless of size or industry, especially in today’s turbulent economic environment. A safety net acts as a buffer to help your business survive economic downturns and unforeseen circumstances, which could create serious financial problems. While building a cash reserve and reducing expenses are two core strategies to follow, in this article by CrmXchange, we’ll explore a host of other methods to create a financial safety net for your business.

 1.Build a Cash Reserve 

As a rule of thumb, it’s good to have enough cash reserves to cover six months of business expenses. While this may seem like a lot of money to store away for a rainy day, during unexpected economic downturns such as the one following the start of the COVID-19 pandemic in 2019, a healthy cash reserve will be the key component helping your business survive while competitors are going under.

Building a cash reserve involves saving a set percentage of monthly revenues in a different savings account. The best strategy will be to invest this money in a high-yield savings account. While this may help you earn just a few hundred dollars more than normal savings accounts, owing to the power of compounding, your interest earnings will increase significantly over a longer time frame.

 2. Reduce Business Expenses 

The process of investing in a safety net becomes much easier by cutting back on business expenses. This is because the money saved can be directly transferred to the savings account, reducing the pressure on the business to earn more. Here are some of the best ways to cut back on business expenses:

• Use Accounting Software: Tracking expenses manually is a tedious and error-prone task. Hence, consider integrating your business bank accounts with accounting software to track every dollar flowing in and out. Additionally, the software will simplify the process of creating financial reports and develop accurate projections, providing you with a 360-degree view of business finances, as reported by Patriot.
• Remove Business Inefficiencies: Review financial reports to identify areas of overspending on wastage and take prompt corrective action. This can include cutting back spending on owing excess storage spaces, company vehicles, and more. Once these changes are made, you’ll instantly have more cash in hand to use towards productive activities and increasing your safety net.

3. Choose A Good Business Structure 

Along with protecting you from business-related liabilities, a good business structure can also help generate a safety net, according to Corporate Direct. For instance, establishing the business as a Limited Liability Company makes you eligible to use certain business expenses as tax write-offs, potentially saving hundreds if not thousands of dollars annually.

Additionally, if an unforeseen circumstance such as a claim or lien against the business does occur, owing to an LLC, you’ll only be liable to pay a limited amount of the claim, compared to a sole proprietorship which leaves you at the risk of unlimited liability.

 4. Consider Working from Home 

Leasing commercial office spaces is often one of the biggest expenses for any business. If this holds true for your business as well, consider pivoting to a remote working model. If you do require space to work, a great option is to rent a large home that includes a home office and plenty of storage space. While this might seem like replacing one expense with another, home rentals are often cheaper than commercial rentals and provide you the flexibility of using them for other activities as well.

In addition to the price, remember to consider other factors such as the number of rooms and proximity to necessities such as the city center, hospitals, highways, and more.

Creating a safety net is as important as any business project. Having a safety net not only protects you from unforeseen circumstances but gives you the confidence to remain competitive in the market at all times. In addition to using digital tools, establishing an LLC, and reducing expenses, moving out of expensive office spaces can be a great way to cut costs and further strengthen your safety net.