The importance of an emergency fund

Key points

• Why having an emergency fund is part of good financial management.
• Consider how much cash on hand you would need to cover an unexpected rise in expenses or drop in income.
• How an emergency fund could prevent you from dipping into personal savings.
• Set some savings goals and consider opening a separate savings account.

If we’ve learnt anything from the past few years, it's that uncertainty is almost certain. From understanding what an emergency fund is, to how to establish one and when to use it, here’s everything you need to know about establishing an emergency fund in case uncertain times are ahead.

What is an emergency fund and why is it important?

An emergency fund or cash reserve is an amount of money your business sets aside for any unplanned expenses. Having money put aside is an important part of managing your business finances and could mean the difference between staying operational or closing in the face of an unexpected event.

An emergency fund can be important for different reasons depending on your business type and industry. It could be useful in a crisis like a natural disaster or pandemic, but also in less critical situations like seasonal fluctuations or when new equipment is needed.

For some businesses, an emergency fund is the same as a savings buffer, but other businesses may require a separate emergency fund and savings buffer. Take the time to define what an emergency fund means for your business and what circumstances you’d use it in. 

An emergency fund is also worth considering to help build financial resilience and minimise financial anxiety. Running a business and needing to constantly monitor your finances can be taxing, so knowing you’re planning for the future with an emergency fund can feel like a safety net.

How much money do you need?

The amount of money needed in your emergency fund will depend on many factors including your industry, business performance and overall goals. Consider your cash burn rate (how quickly your business spends its cash reserves), seasonal influences and what an emergency scenario might look like for your business. Remember, if you do dip into your emergency fund, make it a priority to top it up whenever feasible.

How you can save

You can build an emergency fund by setting a goal for how much you need, establishing priorities and keeping track of your progress. Consider setting financial goals that are specific, measurable, achievable and time bound.

Help establish and manage your emergency fund by: 

• Creating a separate savings account
• Setting up a direct deposit
• Treating your savings buffer like a non-negotiable fixed bill 

Some savings accounts can have fees and other terms and conditions attached. Speak to your banker to find out what is right for your business.

ANZ offers a selection of business savings accounts that may assist you in managing the use of any surplus funds. From the certainty of a fixed interest rate and guaranteed returns to the flexibility to add or withdraw from your savings, there’s a variety of business savings solutions available.

Next steps

Store your business’ surplus cash in a dedicated account. Find the right savings account for your business. 

Download our Cash flow improvement checklist (PDF 1.5MB) for 34 ways to improve your cash flow.

One good way to draw more funds into your business’s savings is to reduce your overheads. Read our tips for managing overheads.

Check out our article "Benefits of keeping personal and business finances separate."