How I’d Build My Business’ Emergency Fund (If I Could Do It All Over Again)

Entrepreneurialism

Nov 5

As a business owner you can’t control your income.

Slow periods
Clients paying late, or not at all
Government shut-downs (ex. Covid)

Which is why it’s essential to keep a cushion in your business bank account and an emergency fund of 12–18 months of expenses and owner’s draws.

Why so much?

Because if you need to tap into your emergency fund, it can take a long time to replenish it. And if another emergency comes up while you’re rebuilding your account, you could find yourself in a dire situation if that first emergency cleaned out your account.

It’s more difficult to build a business emergency fund than a personal emergency fund because your business is trying to cover its expenses, pay you, and the IRS.

Remember, self-employed individuals pay higher taxes than their employed counterparts; there are more expenses exiting a business bank account than a personal one.

This is also why you should build your business’ emergency fund *before* quitting your job and becoming self-employed.

I made this mistake, and it’s led me to overdrawing my business bank account — and having to make owner’s contributions eleven years into business.

If I could do it all over again, from when I started my business, here’s what I’d do:

I’d stay in my full-time job longer.

I quit my job before my business was able to support me. We tend to overestimate our income projections and underestimate expenses and taxes when starting out.

Keeping your job while growing your business allows you to build an emergency fund for both yourself and your business, be discerning with the work and clients you take on, and establish recurring revenue so when you do quit your job, your business can immediately support you.

This would be my emergency fund savings strategy:

Live on my business income as soon as possible. But not actually pay myself an owner’s draw.

Instead, I’d live on that amount from my paycheck and put the rest towards my personal emergency fund.

The owner’s draw my business could afford to pay me would go towards my business’ emergency fund.

Example:

Business Income:
$5,000/mo
- $750 expenses
- $1,275 taxes
- $2,800 owner’s draw*
= $175 cushion (keep in account)

*Instead of paying myself this amount, I’d put it in my business’ emergency fund.

Employment Income (net):
$3,000/mo.
- $200 to personal emergency fund**

**$3,000 employment income — $2,800 business owner’s draw = $200 difference

The benefits are threefold:

Not only would I have been building my business and personal emergency funds, I would have been testing if my business could support me by living off what it could afford to pay me.

Which would have also challenged me to reduce my personal expenses—and maybe find minimalism sooner.

And because I’d be busy with my full-time job, the time I spent working on my business would be allocated towards tasks that actually moved my business forward. Nothing like time constraints to make you prioritize.

Along with undercharging, my biggest business regret is leaving my job too soon, both of which are impacting me financially today.

My belief in my business has encouraged me to persevere, and I’ve learned how to do better moving forward. And by sharing this account, I’m hoping to encourage other business owners to do better than I did from the start.

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