Building Your SME's Emergency Fund: 6 Tips and Considerations

The Philippines is currently experiencing a rise in small or medium-sized enterprise (SME) registrations, thanks to the combination of a booming economy and continuous digital transformation. Indeed, the digital economy has opened up a new world of possibilities for smaller businesses and this growth is expected to continue for several more years across most sectors.

Even so, things like natural disasters, shifting markets, and sudden failures of critical equipment are all but inevitable for any Philippine SME that’s in it for the long haul. If you stay in business long enough, you will inevitably face challenges that require you to either ride the incoming wave or pivot to a new direction. Either way, it’s going to cost you money. This is when emergency funds become indispensable.

While it’s true that loans, business insurance, and government bailouts do exist, any entrepreneur worth their salt knows that these cannot be depended on by themselves, especially in today’s unbelievably fast-paced market environments. In these situations, cash remains king and businesses with good cash reserves are in the best position to continue operating or recover quickly when setbacks do eventually happen.

Let’s quickly go through some best practices for emergency fund savings that will keep your small business running along, even during the worst economic downturns:

1. Determine Your Optimal Emergency Fund Target

As a rule of thumb, all businesses must aim to save at least 3 to 6 months' worth of operating costs. This guarantees one or two financial quarters' worth of breathing room so that the business can carry on or move in a new direction, if necessary.

The reason you don’t want to go much higher than this is that emergency funds, like any savings fund, lose value from inflation. To slow that loss down, you can choose an online business banking service like Maya Business Deposit with higher interest rates. Meanwhile, cash in excess of six months’ worth of operating expenses is probably best reinvested into the business.

2. Start Small and Build Gradually

For most SMEs, 3 to 6 months’ worth of operational expenses isn’t exactly small change. However, the power of compounded interest means that small, consistent contributions will make it doable. Allocating a percentage of your monthly revenue to the emergency fund, even if it’s just 5%, will eventually compound into significant savings. Again, choose an online banking service with higher interest rates to make this process even faster.

3. Separate the Fund from Operational Accounts

Speaking of banking, it’s good practice to keep your emergency fund in a dedicated account, separate from your regular operating accounts. This minimizes the temptation to dip into it for other purposes and provides you with a clear picture of your financial cushion.

4. Always Shop Around for High-Interest Savings Accounts

As mentioned, higher interest rates mean faster fund growth and lower inflation losses. For these reasons, you’ll always want to be on the lookout for high-interest savings accounts or low-risk investments to put your money in. Don’t hesitate to transfer your funds the moment a better opportunity arises.

5. Conduct Regular Risk Assessments

Though 3 to 6 months’ worth of operating costs is a good guideline for a business emergency fund, it isn’t always applicable. Understanding the specific short- and medium-term risks your business faces may help you figure out how much you need to save.

For instance, if you have a manufacturing business, you may need to account for equipment breakdowns or tech upgrades. If it’s a complex manufacturing concern, implementing fixes while keeping operations moving along is probably going to require significantly more than just 6 months worth of cash. Regularly reassess business risks and their potential cost so that your emergency fund target is as big as it needs to be.

6. Consistently Minimize Non-Essential Expenses

Last but not least, work with managers to actively identify where you can cut costs without compromising quality or productivity. Typical areas for optimization include supplier contracts and energy usage but you should look beyond these to see how else your business can conserve funds. Addressing enough of these areas may free up some money that you can direct to your emergency funds.

Start Developing True Business Resilience Today

Attitudes related to the Philippine economy remain largely optimistic, and you can’t always fault entrepreneurs who prioritize continuous growth over security. Still, an emergency fund is more than just a financial buffer. It is a guarantee that your SME can survive serious market upheavals.

It’s worth remembering that outside investors and auditors also see healthy emergency funds as a sign of good business health. Even if you don’t see emergency funds as crucial for continuity, you should still set them up to encourage trust in your business.

Wherever your SME is on its journey, it’s a good idea to periodically re-evaluate its current systems and identify areas where you can optimize savings so you can create more room in your budget for emergency funding. For better savings efficiency, find online business banking solutions like Maya Business designed to simplify building your emergency fund.

Don’t make the mistake of waiting until a recession looms to start saving. When a recession does seem imminent, chances are you won’t be able to spare that much cash anyway. Instead, try to get your funds prepared while your business is still thriving. Take the first step and plan your savings fund to fully guarantee your business’s future.