How to build an emergency fund for your SME

One needs to strike a balance between reinvesting surplus profits into the business for growth and saving for emergencies: Jeremy Lang, Business Partners.
It is always best to start as soon as possible. Image: Getty Images

Saving for a rainy day is not easy, but the global pandemic has proven that putting some money away for your business for when times get tough has long-term advantages.



MELITTA NGALONKULU: Welcome to the Small Business Conversations podcast. My name is Melitta Ngalonkulu. In this week’s episode we discuss how you can create an emergency fund for your business. The pros of creating an emergency fund for your business essentially boil down to one thing, and that is that you need to put money away. It’s not always easy, but the lockdown has proved that it’s essential. The regional general manager at Business Partners, Jeremy Lang, joins us this week to give us a few tips on how to build that emergency fund. He has been working with small businesses for over 13 years. Jeremy, thank you for joining us. How can small businesses go about building an emergency fund?

The regional general manager at Business Partners, Jeremy Lang. Image: Supplied

JEREMY LANG: I think the Covid-19 pandemic has taught SMEs a very valuable lesson – that saving for a rainy day does indeed have benefits. It does take planning and discipline. So one needs to build it into your budget every month. We don’t often see savings or emergency funds in the budgets of SMEs.

And then, once it is in the budget, ensure that you’re disciplined enough to put away the surplus cash flows that you’re able to every month, in anticipation of an event such as Covid-19

MELITTA NGALONKULU: Jeremy, is there a rule of thumb when it comes to saving?

JEREMY LANG: Yes. I think one needs to strike a balance between reinvesting the surplus profits into the business for growth and saving for an emergency fund. So one needs to consider covering your overheads – at least fixed overheads – and this will normally consist of wages and salaries for the most part, for about three months.

But it’s not only about being able to cover the overheads for three months. It’s about also buying you time to reassess your position, to access other funding avenues and funding channels should you need to because, when you do approach other funders for additional capital for your business, that doesn’t happen overnight. So being able to cover your overheads for a period of three months is really important, both in keeping your business open and trading, but also in allowing you to change tack, change strategy, and access additional funding lines should you need to.

MELITTA NGALONKULU: Jeremy, now that you’ve clarified how to accumulate the money that one needs to store away, where should businesses actually put all this money?

JEREMY LANG: I think an emergency fund is not something that you need or want to put in high-risk investment products, because you want to preserve that capital that you’re saving. And the second point is that you need to be able to access it quite easily and quickly. So it will probably have, more often than not, lower-yielding returns, but be in an investment product such as a money market account or a fixed deposit, for example, which will generally yield lower returns, but is very good in preserving the capital value of your savings, taking into account inflation and the time value of money.

So an emergency fund should not be in a higher-risk investment that you’re looking to earn big returns on.

It’s really about preserving that capital and making sure that it’s safe. And then, when you need it, you can get access to it, and you can get access to it relatively quickly, without big penalties being incurred in the process.

MELITTA NGALONKULU: To whom can small business owners actually speak about putting away money?

JEREMY LANG: I think financial advisors, financial consultants, or even the accountants are very good professionals who understand finance and understand the value of saving and striking that balance between reinvesting and saving for an emergency fund. They are professionals with experience who are definitely able to offer good advice as far as this is concerned.

MELITTA NGALONKULU: Is it something that’s actually easy to start? Can you start it off in the first month of your business?

JEREMY LANG: Yes. At the moment one needs to consider that it may not be an environment where you are generating huge cash flow surpluses that you can save. At the moment it’s about survival for many SMEs. So one needs to consider when the right time is when there is a consistent cash flow surplus that one can put away. There’s never a better time than the present to start saving, but you’re limited by the cash flows that you are able to generate.

The second point is that in saving over a period of time you don’t see the benefit immediately. It does require patience and discipline. Over a few years, you build up this nest egg. So that’s really important. But my advice would be to start by putting savings away for a rainy day as soon as you possibly can.

MELITTA NGALONKULU: Jeremy, how do you even know when’s the right time to start using the savings?

JEREMY LANG: What one needs to understand about what’s happening in the environment as a business owner, is the economic shock that we experience only temporarily. Can your business absorb it without tapping into it, or is it a more sustained economic shock over a period of time? Covid-19 is a very good example, where you will need to cover the overheads, particularly where you see drops in turnover over a period of two to three months. Those are normally good indications of you having to then tap into some of your reserves.

So the secret, really, is to read, to engage with what’s happening in the environment, in the world, and how that impacts South Africa and your industry, and your business in particular. If it is going to be for prolonged periods, that would be a good time to start using the reserves if you need to. And, while you are using the reserves, really start to look at funding channels that can assist you beyond the two to three months that you have been saving for.

MELITTA NGALONKULU: Thank you so much, Jeremy, for joining us. That was Jeremy Lang, the regional general manager at Business Partners, giving us pointers on how to ensure all our businesses have an emergency fund for a rainy day.

Listen to previous Small Business Conversations podcasts here.

To listen to other podcasts, go to or follow Moneyweb News on the Moneyweb app, Twitter, Facebook, and LinkedIn for updates.

In the next episode of Small Business Conversations with me, Melitta Ngalonkulu, we talk to Roné la Grange, a partner at the tax practice at Bowmans, on the importance of being tax-compliant.



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