Yet vanishingly few of them have an emergency fund stashed away somewhere to deal with such events, says Byron Jeacocks, regional general manager of Business Partners Limited (BUSINESS/PARTNERS).
Given the nature of growing businesses and the entrepreneurs behind them, this is understandable. A growing business is fiendishly cash hungry. Entrepreneurs are more focused on the immediate practicalities of building their businesses than on vague risk assessments. Besides, they tend to be chronically optimistic about the future good luck of their business, even as they throw up their hands saying: “There is no way that I can squeeze cash out of this business for an emergency fund.”
Jeacocks believes there almost always is a way. He points to an example of a business in the chemical industry for which BUSINESS/PARTNERS financed a management buyout some years ago. The viability of the business, which exported almost all of its produce, was carefully calculated with an exchange rate ranging around R10 to the dollar, but suddenly the rand strengthened to an unthinkable level of R6 to the dollar.
Everyone thought that it surely meant the end of the business, yet it survived. “It didn’t make the R10m projected profit that year, but it made R1m,” Jeacocks says.
How that business pulled through the crisis taught him that there is virtually no such thing as an unadjustable expense. “When you think you cannot cut expenses any more, think again. Business owners must take a radical view of their expenses. Don’t take it for granted that the expenses are a given,” he says.
That is what the company did when their revenue plunged due to the exchange rate. Their first step was to cut staff to the barest minimum, even though it was a highly technical business that employed scarce skills.
Retrenchment was not the only option. They kept their financial manager, a chartered accountant, but tasked him to sell his services to other businesses so that they could share his time and cost, and make their accounting department affordable.
As businesses grow, they inevitably pick up excess staff who at first assessment may seem essential. It is only when a restructuring is the only choice available to the business owner that everyone realises that the team can always be leaner, says Jeacocks.
Furthermore, the firm shrunk the floor space they occupied and rented out the unused offices. They reviewed their insurance cover for their vehicles and disability cover for their staff and realised substantial savings.
There are numerous small expenses that seem negligible on their own, but together become significant. Simple rules and processes to manage small expenses such as staff tea and coffee, toilet paper, water and power can add to the savings.
Once business owners realise that expenses can almost always be cut, and that almost every business can save a little towards an emergency fund, the next step is to set a goal. A good rule of thumb is to have three to six months’ worth of overheads set aside, but even just one month’s expenses is better than nothing.
Jeacocks believes the goal and the will on the part of the business owner to attain it is critically important for setting up an emergency fund for a business. The cash demands in a business are so constant that any vague or half-hearted attempt to establish an emergency fund will fail. It will have to be a conscious and disciplined effort by the business owner.
The next step is to decide what constitutes an emergency. If an emergency fund can be dipped into every time you want to avoid an awkward phone call to the landlord to say that the rent will be slightly late this month, it won’t last long. A true emergency is one that threatens the survival of the business.
Thinking through and writing down a list of possible emergencies that would justify the use of the fund is a good risk-assessment exercise for any business.
Finally, some thought needs to be given to where an emergency fund should be kept.
Gambling with the money on the stock exchange defeats the object. A money-market account is a better idea, but the funds should not be so accessible as to tempt the business owner to dip into it on a whim. On the other hand, it should not be so inaccessible that you cannot access it fairly soon when an emergency does strike.
Jeacocks recommends a set of notice deposit accounts with varying notice periods so that a limited amount can be accessed immediately, and some a little later, which allows for some interest to accrue while the money, hopefully, will not be used any time soon.