We’re all pretty well versed in the idea of having an emergency fund for our family. Experts preach different levels of funding, but a consensus seems to form around the idea of having at least six months of expenses saved and easily accessible. That seems like a prudent thing to do.
Having an emergency fund for a business is less commonly discussed, but it’s no less important. Disasters happen. We get reminded of that fact every day on the TV news. It’s hard to imagine that there wasn’t a law firm in the path of that tornado in Oklahoma.
Taking Care of (Your) Business
Establishing a business emergency fund can be challenging. For most of us, our biggest expense is payroll. Payroll can be a big number, and a month or two of payroll without revenue would wipe many law firms right off the map. The emergency fund for the business may need to be much larger than what’s required to cover our personal expenses.
An emergency fund isn’t the only way to deal with disasters. Insurance is another option. In fact, the landlord or mortgage holder usually requires tenants to obtain fire and other types of property damage insurance. However, compensation for loss of revenue isn’t always covered, and you should look carefully at your policy. Talk to your broker about business continuation coverage.
Think through all the potential problems that might give rise to the need for the use of the emergency fund. Fire and natural disasters come to mind immediately: they happen all the time. Other scenarios can cut off your revenue as well. Think about it for long, and you’ll find yourself curled up in a fetal position under the desk.
Planning for Personal Emergencies
Imagine what would happen if a key attorney fell ill. If you’re in a two-attorney practice and one of the attorneys becomes temporarily disabled, you can rapidly fall into financial difficulty. When that attorney stops billing, the revenue stream quickly stops. Sure, disability and health insurance may cover the attorney’s personal expenses, but how will you pay the team that had been supporting the attorney?
Some firms purchase key person insurance for these situations. Think of it as life or disability insurance for the benefit of the firm when a key person is unable to work. It can be expensive to purchase these policies, and rates will likely depend on the age and health of the key person. It costs you nothing to talk to an insurance company about your options.
Some firms arrange a line of credit with their bank to handle these challenging situations. Today, however, you can expect your bank to slash your credit line if it senses that you might have difficulty recovering from the problem. Don’t count on the bank to leave the line alone if it discovers that a key revenue producer is out of production or that you’ve experienced a disaster that’s not covered by your insurance. The bank will cut and run as fast as it can.
Get Your House in Order
Ultimately, you’ll want a savings account for the business. If you presently have nothing set aside, it can be overwhelming to think about how much you’ll need and doubly overwhelming when you process how challenging it will be to save the money. It’s tough.
However, there is no time like the present to get started. Set up an account. Put aside some small amount. Do the same each week or month. Slowly, over a long period, you’ll accumulate the funds you need to deal with an emergency.
Then, once you’ve saved what you need, when the wind kicks up, you won’t worry about your business. You’ll feel secure in the knowledge that you set aside the funds required to weather any storm.
