Savings includes money you set aside to cover future planned or unexpected expenses. It’s important to outline savings in any business plan as a way to achieve business goals, prepare for unforeseen events, maintain operations when sales are low and earn interest, if you use a savings account at a financial institution.
Why is saving important for growing a business?
- Helps you prepare for unpredictable events. With savings on hand, you can ensure slower sales periods or unforeseen challenges won’t impede your business.
- Allows you to earn on savings. Maintaining a savings account with a financial institution can generate revenue for you in the form of interest. Consider the options available and choose the one that fits your needs. You will want to consider how much money you hope to save, how you will access the funds, how much interest you can earn and when you’ll want to withdraw the funds.
- Equips you to achieve your goals. Setting medium- and long-term savings goals can help you improve or expand your business, open a new point of sale, make repairs and more.
How can you save?
If you’re reluctant to start saving or believe it isn’t possible, think of it as a path to exciting opportunities rather than a burden. Chances are you’ll need the funds for unexpected situations in your business, good and bad. Here are some basic steps to get you started.
- Create a budget and stick to it. When you make a monthly budget, consider overestimating your expected costs. This way, you’ll likely end up with leftover funds, which can go right into savings.
- Pay yourself first. Determine a set amount of money to put away every month and treat it like any other bill. Put away part of your revenue and watch your personal savings grow.
- Save wisely. Choose the savings methods that best match your goals. You can research multiple financial institutions to see what types of accounts are available and how much interest each one offers.
- Be ready for the unknown. Create an emergency fund with three to six months’ worth of business expenses. All businesses encounter hard times. With savings to help you get through three to six months, you’ll be more equipped to make sure your business stays open.
- Set financial goals to stay on track. Use SMART goals so you know exactly how much you want to save and how long it will take to get there. When you set clear goals, it’s easier to stay motivated and track your progress.
Set saving goals
Before settling on methods for saving your money, you should determine a reason to save. This goal may centre around purchasing new equipment, hiring more employees, making improvements to your place of business, or simply saving for unplanned expenses. Having this end goal in sight will help you reach that milestone. Whatever your goal, the amount you save does not need to be large. To jump-start your savings, consider designating a certain amount per month rather than just a one-time deposit.
Real-life reasons to save are good motivators. Think about short-term goals (current month or year purchases) and long-term objectives (for important events and big expenses) using this SMART goal guideline:
Specific goals inspire. Setting a clear goal with specific outcomes will help you focus on saving.
Measurable goals let you see the real task at hand. By using real numbers, you can measure your progress along the way.
Attainable goals pay off. When setting your goal, ensure that it is within your reach.
Relevant goals make good sense. Set a goal only if you know it will be meaningful in the long run.
Time-bound goals have a real deadline. Setting a time frame for your goal will help you stay committed to reaching it.
Once you’ve set your financial goals, it’s time to start saving. Choosing the right savings method is dependent on a few factors: how much money you hope to save, how you will access your funds and when you’ll want to withdraw them. The first step is evaluating the options available.
There are many categories of savings accounts to choose from. You can use one savings account or multiple accounts to organise and separate your money for various purposes. Many businesses use different savings accounts based on when they’ll want to withdraw funds and what they’ll be used for.
For example, you may open one savings account for money that’s going to be used to buy a new building in a year, and another savings account for unexpected expenses. Keeping the money separate can help you avoid the temptation to spend the money on something else.
One great benefit of keeping your money in savings accounts is that you can earn interest on what you save. The amount you earn will depend on the account’s interest rate and how frequently the interest compounds (how often it gets added to your account). Accounts with a higher interest rate and more frequent compounding rate will earn you more interest.
Here are a few different savings accounts to consider:
- Basic savings accounts offer the lowest interest rates, usually less than 1 percent, but you can easily withdraw your money by transferring it to a different account or withdrawing cash at a branch or cash machine. Look for an account that won’t charge you a fee, no matter how much money you keep in the account. Basic savings accounts are usually offered by brick-and-mortar banks, but may also be available via online banks.
- Money market accounts may offer higher interest rates than basic savings accounts and often make it even easier to access your money. You may receive a debit card or cheques that can be used to withdraw or spend money from the money market account. However, you often have to deposit a lot of money to meet the minimum balance requirement to open an account and keep the high balance to earn interest.
- Online savings accounts offer interest rates that are similar to money market accounts, but generally don’t have cheques or debit cards, which may be a benefit if you don’t want to be tempted to spend the money. You can still easily access your money by transferring it to a different account. Or, if you also have an online current account with the same financial institution, you can withdraw money from your savings account at a cash machine. However, with this option, you won’t be able to speak with a customer service representative in person.
No matter which type of savings account you choose, consider setting up an automatic savings plan. These plans automatically transfer a set amount from your current account to savings each month, helping you build your savings without having to think about it.
Creating an emergency fund
An emergency fund is money that you have saved to help cover unexpected costs associated with running a business. These costs could be related to a slow sales period or an unplanned event, like a natural disaster or damage to your business and inventory. Many of these costs can’t be predicted, and almost everyone will face these expenses throughout the lifecycle of their business. With an emergency fund in place, you can ensure you’re prepared to resolve an unexpected financial setback. Experts recommend building and maintaining an emergency fund that would cover three to six months’ worth of business expenses. Learn more about how to create an emergency fund and plan for emergencies.