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Setting up a small business emergency fund

How do you set up an emergency fund for a small business?

    by Dave Ramsey | Columnist, External
    Published 

Dear Dave,

How do you set up an emergency fund for a small business?

-Eric

Dear Eric,

In business, we would name it a little bit differently. Instead of an emergency fund, we'd call it "retained earnings," but it's still the same thing. Retained earnings serve several purposes. They could act as an emergency fund, or they could be used to expand the business and launch a new product line. You could also use retained earnings to take advantage of opportunities in the marketplace. This means you could buy out a competitor or buy up additional inventory at a great price.

All businesses have cash needs to stay open and keep moving forward. Your retained earnings could easily be a pretty large account. Of course, you can keep them in a simple business account. That's not a big deal. But in terms of the amount of retained earnings, I wouldn't be in panic mode if I didn't have three to six months of expenses like with an emergency fund in personal finance. That could be a lot of cash, but then you'd be acting as your own credit line too.

That's how I would do it, Eric. Open an account, call it retained earnings and let that one big chunk of liquidity (that big pile of cash) serve several of your business needs - including the need to stay out of debt!

-Dave

Dave Ramsey is America's trusted voice on money and business. He's authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids and is out now. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.