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The importance of saving towards a contingency fund

POSTED: 7th December 2015
IN: Guides
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Everyday business obstacles, such as overdue invoices, unexpected expenses and seasonal fluctuations, can all affect a business’ cash flow, which is why many business owners believe in saving towards a contingency fund.

Having a contingency fund, or rainy day fund, in place is essential for safeguarding a business, providing a layer of financial protection and security. At present, UK SMEs are estimated to be spending an average of £955 a month each chasing money owed to them in unpaid invoices, according to research from Bacs Payment Schemes. Without capital on hand, many of Britain’s smallest businesses may struggle to overcome such hurdles.

How much should SMEs save?

The general consensus between experts is that businesses should aim to maintain a contingency fund equal to a minimum of three to six months of operating expenses, but what that figure actually amounts to will vary from business to business.

Rent, utilities, payroll and any regular payments such as insurance premiums are all basic costs that should be accounted for. Beyond that, a healthy post of cash set aside for less-pressing but nonetheless valuable expenses, such as staff training, can often be the key to business growth.   

SMEs aren’t using savings accounts

Despite the necessity of having savings to protect against unforeseen events, a troublingly large number of SMEs are not putting any money away in business savings accounts. In fact, a recent study by Aldermore found that worryingly, 69 per cent of SMEs are currently trading without a business savings account.

By having money set aside in a business savings account, SMEs are able to give themselves the financial protection they need to keep operating, even if unforeseen events or changing circumstances have a negative effect on their cash flow. The benefits of business savings go much further than this, however.

The SMEs surveyed by Aldermore who were putting money into a business savings account had a number of different reasons for doing so: while 40 per cent were saving towards a contingency fund to deal with unforeseen events, 35 per cent were saving to pay business taxes, 34 per cent were saving to help with cash flow fluctuations, and 28 per cent were saving to earn better interest.

How can SMEs start saving towards a contingency fund?

Businesses should ideally have a structured, long term plan in place, which can help when it comes to putting money into a business savings account. By understanding current operating costs, as well as how any future growth plans could impact operating costs, SMEs can begin to budget towards a contingency fund.

Once a business has an established, structured budget in place, they can choose a set amount to put away each month. Many businesses will choose to set up an automatic transfer or standing order, so the same amount will automatically be saved each month.

Aldermore’s SME Rate Checker tool allows businesses to check the interest rate they are currently receiving on their surplus funds and to compare those to the rates they could earn with Aldermore. For more information about the benefits of business savings accounts, get in touch with Aldermore.

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