#6: SAVE SO YOU DON'T CAVE

Today’s topic is all about saving and why it needs to be a priority in your personal life as well as in your business. We’ll also dive into some different savings accounts I recommend having and why. Emergency, tax, operational, and investment savings accounts are so very important in your business and can mean the difference between surviving and caving in tough times.

Everyone’s business is different, but you can use this episode as a guideline to be as prepared as possible in your business and your life. 

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Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.

Transcript

Hi! I'm Leslie Roth and you're listening to Financially Adjusted. Today's topic is all about saving and why it needs be a priority in your personal life as well as in your business. We'll also dive into some different savings accounts I recommend having and why. So, let's get right into it. First, we're going to talk about business savings. When you have a business there can be a lot of variables and a lot more reasons to prioritize savings. Not only is your business your livelihood, but you're also responsible for the livelihood of others if you have a family or employees or both and they count on the success of your business. COVID shutdowns alone also proved that business owners need to have a cushion to fall back on for the roughest of times. Unfortunately, many businesses went under because of the shutdowns which was really hard to see. In business there's a lot of things that are within your control and there's a lot of things that are out of your control and unknown variables that can affect your business. For instance, with inflation we're seeing an increase in the cost of pretty much all goods and services. This can affect everyone differently but it's safe to say that we're all feeling that pinch right now.

Also, depending on the type of industry you're in regulations and taxes can increase your expenses. For example, regulations and taxes for short term real estate rentals have increased in many areas and it's decreasing profit margins in these businesses drastically.

Cash flow issues are one of the biggest reasons that businesses fail that could otherwise be successful. You can have market demand, and an amazing product or service, but if you don't have the cash freed up at the time you need, it's going to hurt you.

This might not be immediate depending on your specific situation but, for some, it will be. During COVID shutdowns, many businesses had a huge source of revenue or all of their revenue halted indefinitely. The businesses that failed were the ones that weren't prepared. The reality is that many of these businesses could have survived and held steady with the right amount of savings to get them through during those tough times.

I didn't make this episode to scare anyone. I promise. My goal is to get real with you about a big factor of survival in business. That you can not only survive but thrive in your business and in your life. You're probably wondering “well, Leslie, what do you recommend as far as saving?”  , so we'll get into that next.

We're going to talk about 4 main types of business savings accounts that I recommend having. Tax, emergency reinvestment, and operational cushion. 

The first one, tax savings, is because taxes are still coming due during difficult times. It doesn't matter. That IRS wheel just keeps on turning. I don't want you to be the type of business owner that has a huge tax bill at tax time. It can be really deflating, and it can be really difficult to navigate and take you many steps back financially. So, I recommend saving 25-30 percent of net profit each month to cover your federal state and local taxes. You'll have this money readily available to pay your estimated taxes throughout the year as well as some leftover for any additional that might be due when you file your taxes. 30 percent is going to be your safer bet for having enough to cover taxes, but I recommend talking to your tax or bookkeeping professional for their opinion since they know your specific situation. And something important to note with this savings account is that even if you have some leftover after filing taxes, you should really keep it in that tax savings account as an extra cushion moving forward. You should always be assessing the amount you have based on net profit. If your tax pro gives you recommended estimated amounts, this is the amount to send in to avoid penalties and based on your estimated net profit that you spoke about together. But as you grow throughout the year, you might grow substantially more than you thought or projected., so you're gonna want to have that in your savings account to cover it.

Next, we're going to talk about emergency savings. This is a very important savings count and will be pretty much what you fall back on in in tough times if your revenue is significantly affected. I recommend six months of core operational funds. This is going to be the amount that it takes to keep the lights on and to continue to pay yourself and your employees. And will, of course, vary a great deal from business to business. The one caveat to the six months of emergency savings is if you're in a lot of debt. If you're in debt and you're in the process of paying that off right now in your business, it might be more difficult to save that six months and pay off your debt at the same time. So, in this case, I recommend saving three months and then really focusing on paying off that debt. And then getting to your six months.

Now the third savings account that we're gonna talk about is a reinvestment or general savings account. This is going to be savings for anything you want to invest in for your business, including goals that are specific to your business. It could be anything from buying a piece of equipment to hiring a consultant. Even if you don't have specific goal right now there is a good chance that later on you're going to realize that you want funds to get that piece of equipment if it breaks down or an opportunity pops up that you really wanna have the cash for. So, if you have this pile of cash sitting there for you when you get to that point, it would be really nice right? Reinvestment…of course that's not going to be a priority over tax or emergency but if you get your emergency fund funded and you don't have debt that you're paying off, this is a fantastic savings to focus on because you know you're reinvesting money into growing yourself and growing your business, which is huge. 

The last savings count that we're gonna talk about isn't actually a specific separate savings account. An operational cushion is something else we could call it and it's going to be one to two months of operational expenses that sit in your operational checking account and acts as a buffer so you can transition from month to month without having any time throughout the month that you go down to zero or close to zero. So, you want that buffer in order to just be able to pay your bills when you need to and not have to worry as much about the timing throughout the month. This can also help in an emergency situation because if you have this one-to-two-month operational buffer, more time can pass before you have to touch that true emergency fund. Now, for emergency and tax savings it's especially important to have separate savings accounts that you don't pay attention to. If you are someone that struggles with this, maybe you should have an entirely separate bank for your savings account versus using the same bank you log in to all the time for your day-to-day operations. Set yourself up for success by getting real with yourself when it comes to this and know your behaviors. If you know you’re the type of person who will be tempted to use your savings account because you're looking at it all the time and It's tempting you, you definitely need to take measures to avoid this. Whether that's the separate bank account or having an accountability partner. Whether that's a true partner in your business, your spouse a friend, and whoever can hold you accountable for not using that money you're gonna potentially need one day. Then let's say you've gone through your emergency fund and, you you've had an emergency, and that fund has gotten you through and you're just coming out of the emergency. You're going to refund that emergency fund. So, you're always going to be saving for taxes based on net profit and throughout the emergency. If you have profit, you're going to be setting aside tax savings and that's your number one priority, but your emergency fund is going to be your next goal. If you're in an emergency situation with your business, you can also pull from your reinvestment savings account if you needed funds or to refund the emergency fund. In that situation, where your emergency fund is depleted, you can take from the reinvestment savings account because that's not gonna be deemed so much a priority over emergency and tax savings. So, tax and emergency are number one, and then after those are funded, you're focusing on reinvestment. And operational savings is also going to be a priority above your reinvestment savings. I recommend beefing up that emergency fund if you're in a good position to do so. You’re funding your taxes all along but if you funded your emergency fund fully, and your operational cushion is there, then I recommend beefing up the emergency fund to six to eighteen months depending on how prepared you want to be. By keeping an accurate budget each month you can track how much margin you have to allocate for savings.

Personal savings is also so important for many of the same reasons. I recommend three to six months of personal emergency savings as well. This is outside of the business emergency savings. So your personal savings is gonna be completely separate. It's gonna cover your personal bill during an emergency and make up some of the money you might not be able take from the business during those difficult times. If your business is the only income you and your family have, then I would recommend going even above and beyond the three to six months…maybe try to do more of like an eight or nine month emergency fund if possible.

I hope you found this episode valuable and if so, I would very much appreciate it If you follow or subscribe wherever you listen to podcast and feel free to leave a review and share an entrepreneurial friend. Thanks.

Disclaimer: This content is for educational and informational purposes only. Please consult with an accounting professional for direct advice based on your specific business situation.