Tips for Creating a ‘Rainy Day Fund’

by WOHe

In the kitchen and bath industry, as with many industries,
there’s always a tendency to get caught up in the urgent needs of
our businesses and just assume that we’ll deal with the future when
it gets here. But, for most of us, when change does occur
regardless of whether it’s positive or negative we require some
time to react and adjust our businesses accordingly.

In order to provide us with the time required to make the
adjustments to changing circumstances, it’s important to have some
sort of “rainy day fund.” In theory, good forecasting, cash flow
projections and overhead management would provide plenty of warning
of impending cash crunches, but the reality is that most small
businesses are not very sophisticated at this. This month, we’ll
look at some of the ways to manage our cash positions and the
options available to us to help us be ready when that crunch
comes.

What You Need
The first step in evaluating what
you’ll need to be prepared for the unexpected is some thumbnail
cash projections. This can be done fairly easily by analyzing the
activity in your bank account for several months and developing
some averages. In doing this, group the payments that flow out
according to how much flexibility you have in timing them. Some
costs are not very flexible, such as payroll, taxes and rent;
payments to sub-contractors might offer a little more flexibility,
and vendor payments can be quite flexible by negotiating extended
terms with some suppliers.

Now that you have some data on your cash requirements, you can
do some “What if?” scenarios to see what might happen if your
revenue stream were to be disrupted. There are many ways that
revenue can be impacted: Sales drop off and the stream of down
payments is less than anticipated, a large customer fails to make a
promised progress payment, a project is halted by weather, permit
problems, etc.

There are also situations where you get hit with unexpected
costs: Storms, theft or accidents can disrupt your business and may
require, at least temporary, large cash outlays. Since most of our
businesses have only a handful of projects underway at any one
time, any of these situations could produce a significant hit to
our cash flow.

When one of these events occurs, it’s important to recognize the
situation immediately and react as quickly as possible to deal with
the impact it will have on your cash flow. Evaluate the situation
to enable you to make a judgment as to how serious the impact will
be and whether it will create a temporary or long-term change in
your revenue flow.

If the situation is temporary and will correct itself, such as
delayed progress payments, then you probably only need enough cash,
or flexibility in your cash flow requirements, to bridge the delay.
If, on the other hand, it appears that the disruption to your
revenue is more long term in nature, such as a drop off in sales,
you will need to take action in order to bring revenue and expenses
into balance.

So, how much of a cushion should you have to see your business
through these times?

There’s no hard and fast answer, but here are some guidelines.
As a minimum, your business should always have available enough
cash reserved to cover one payroll. And, as an ideal, you would
give your business much greater freedom if there were one month’s
worth of cash flow available in your rainy day fund.

Finding Money
Most kitchen and bath firm
owners face many more demands on cash flow than can ever be met.
New tools, computers, raises, etc. all cry out for your limited
flow of revenue. In analyzing the activity in your bank account,
you’ll see that many expenditures fall into a category that might
be termed “discretionary.” Many of these can be delayed, deferred
or forgone entirely.

What this means is that you could add to this list a payment to
savings as an additional discretionary item. Setting money aside
for rainy day savings account is not much different than trying to
save on a personal level. The key to success is to set a goal and
establish a regular, systematic method of adding to the
savings.

Again, as with personal savings, you should start with
achievable goals and savings levels to work toward. The best way is
to attach the savings deposit to an event that makes it automatic.
There are a couple of different approaches to this. One is to save
a fixed amount periodically and the other is to tie the saved
amount to cash flow.

In the first approach, you would set your initial target goal at
one payroll, say $12,000, and then pick a benchmark to make your
deposit. One possibility might be to deposit $500 each payday into
your rainy day account. In 24 paydays, you would reach your initial
goal. Once you have established this pattern of setting aside an
amount on a regular basis, you’ll find that it will be easier to
continue it.

The other approach functions much like a sales tax, in that you
would establish a “tax” rate of say 1%-2% of your collections and
deposit this amount to your savings each time you make a deposit to
your regular checking account. If your initial goal is the $12,000
mentioned above, the 1% savings rate will allow you to reach it on
collections of $1,200.000.

To ease the pain of this rainy day saving, you could also add 1%
to your sales margin when you’re estimating projects, or to your
overhead charge if you work on time and materials. In either case,
it’s unlikely that a 1%, or even 2%, increase in your pricing will
cause you to lose a project.

Once you have established this savings account, you’ll find that
it will give you a degree of freedom that you have not enjoyed in
the past. When it comes time to purchase that new truck, piece of
equipment or other major capital outlay, the money will be there.
Even more important, when you need to walk away from a potentially
troublesome project, you won’t feel compelled to take it simply to
keep cash flow going.

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