By now, I’m hoping you’ve set up a manageable cashflow statement that helps you forecast and control how your money flows in and out of your business. You’ve hopefully also set up policies and procedures to bring home the bacon faster; and you’ve developed a method for parceling your money out to vendors carefully. The next step, principle number four, is … a contingency fund.

Why does a business need a rainy day fund? I don’t mean to be alarmist, but disasters take many forms in business. An economic downturn could suddenly result in a sales slowdown. A major supplier could suddenly go bankrupt leaving you without a source of your bestselling product line. A government audit results in taxes, penalties and interest you were unaware you had to pay. Your truck dies. A flood carries most of your town downstream, including your workshop. A contingency fund allows the business owner to respond to these situations without panic and to bring things back to normal in an orderly fashion.

Experts vary on what is an acceptable contingency fund, but generally three to six months’ expenses is recommended. Personally, I prefer six months of expenses, because while three months may allow for a slowdown in the economy, six months’ worth will give you more elbow room for major disasters.

Creating a contingency fund is actually ridiculously easy. Every time you make a deposit from sales, transfer 10% to a savings account. Why 10%? No special reason other than it is easy to calculate. Look at your deposit and slide the decimal point one spot to the left (for example, a deposit of $10,567.48 would mean a transfer of $1,056.75 to your savings; or $1057 if you want to round it to the nearest dollar). Small home based businesses with little overhead might use 5%, while businesses with large payrolls might consider 20% instead. Play with the percentage a little until you determine what works for you.

What if your sales come to you predominantly by automatic deposit; such as debit and credit cards? First thing Monday morning, before you look at what bills you have to pay and who you have to remind to pay you, obtain the deposit transactions from your bank account for the previous week (internet banking and accounting software are two great tools for this). Add up all the deposits, and transfer 10% of that total. An added bonus to this technique is that this money is “out of sight, out of mind”, and gives you a stronger incentive to manage your receivables and payables effectively.

Now while very simple, it does take some people a little while to get into the habit. And, sometimes, an unexpected expense comes along or a cheque bounces; and you may need to dip into that contingency fund a little. That’s O-K-A-Y! Persistence will eventually pay off. And, suddenly one day you’ll realize you’ve a nice rainy day fund put aside. Hey! I’m all for one less stressor in my life! Aren’t you?

Ms. Andrée Cusson is a Certified Management Accountant (CMA), a Sage 50 Accounting Partner, and Intuitive Consultant. She provides controllership services; management consulting; strategic alignment; tax planning; Sage 50 (formerly Simply Accounting) turnkey set up; and “work smarter, not harder” strategies and advice. Her passion for the past 15 years has been to assist entrepreneurs and individuals with fulfilling their financial goals and dreams. Her practice is based in Oakville, Ontario, Canada.