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Between franchises and other small businesses in need, our home is currently filled with phone calls from distressed companies during the coronavirus pandemic.
Everyone is looking for advice, financial assistance, and expertise on the new government support. The lucky ones are making quick changes and using this for hunkering down while planning for a nimble re-entrance into business-as-usual in May? June? July? Who knows?
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Waiting for the economy’s restart is stressful with some franchises teetering on the brink. However, with the anticipated influx of cash and forgivable government loans, the franchises who had an emergency fund are faring better than those without. As with personal cash, those who maintained a minimum of three months’ worth of expenses are sleeping a little better at night during this very unexpected change.
An emergency fund, or retained earnings, is meant to assist if there is an emergency or cash-flow shortfall. Certainly, both of those circumstances exist right now for many. As your franchise prepares and plans for robust expansion and grand re-openings, make it a priority to build cash reserves. It will better ensure the business against the next unexpected change in the economy.
Guidelines for Building Your Financial Safety Net
Each franchise is different, of course, but these ideas will help create a healthy fund for emergencies or opportunities:
- Make 25% of your annual revenue the goal. Some experts suggest at least 10%, but it’s better to have more than less. You may not need it all, but forecast high to be prudent and prepared.
- Automate the savings. Establish an automatic transfer from your business’s operating account into a separate emergency fund. This can be weekly or scheduled around payments that you receive regularly. If cash flows vary greatly, earmark one particular revenue stream for your emergency fund.
- Save a part of each transaction. Just like banks offer a way to round up every debit card purchase to the next whole dollar, put the extra pennies or a portion of every transaction into a separate account. If it’s automatic, it will build almost magically with small amounts whose absence you won’t feel.
- Target payroll and benefits. To help determine how much to save, focus on the immediate needs of payroll and benefit payments. While the CARES Act is helping with some of that this time around, it is unusual, and missing payroll can be suicide for a small business. Cutting staff in an emergency might be necessary, but in the current situation, keeping staff is part of the federal loan forgiveness requirements, so those funds are critically important to have for employees.
- Cut costs. A penny saved really is a penny earned. For most franchises, rent costs and staffing expenses are the highest. Review and renegotiate actual needs. Maybe a smaller location makes sense or fewer employee hours are in order. You might need to work more hours to maintain a financial safety net.
No matter how you get there, your retained earnings for future emergencies will be your safety net the next time an economic crisis hits. And it will. It always does.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.