How to Build a Financial Safety Net for Your Business

handing money bag

There is no amount of preparation you can do to avoid every unexpected obstacle in running a business. What you can do, however, is build a safety net that can help soften your landing in case something happens in the future.

Having a safety net for your business is like having a flood insurance policy for your house. You don’t know if and when a flood will ravage your home, but your coverage still protects you. When it comes to business, you’re not sure if your finances will remain in good shape throughout, but a safety net will provide something to fall back on in case you run into money troubles.

Before starting your business, here are the best ways you can build your safety net:

1. Build an emergency fund

First and foremost, you have to have an emergency fund that contains at least three to six months of operating expenses. If your business has problems with cash flow at any time, your emergency fund will help keep you afloat until you can remedy the problem. Moreover, having an emergency fund gives you more confidence when taking calculated business risks, which will allow you to pursue tremendous but risky opportunities as they arise.

2. Get another source of income

A secondary source of income provides extra cash that will keep the lights on if your business doesn’t make a profit in its first few months. It will also serve as a source of funds in case of unprecedented expenses for your business.

It is wise to find another source of income before you start a business. A part-time job that is not overly demanding is an excellent place to start. Alternatively, you can freelance for other companies on an as-needed basis so that you can focus on your business when you need to.

3. Consider staying at your day job

graphic designer

For many entrepreneurs, quitting their day job is ultimately the goal. However, if you feel that your finances will be too shaky if you leave your full-time job now, consider staying until you have built a stable fund for your business.

Staying at your day job does not mean you can’t start your business yet. Although it can cause many sleepless nights, you can launch your business while working a full-time job. Once your business gains traction and you start to earn a profit, that’s an ideal time to work on your business full-time.

4. Ask for a part-time or consultancy position

If applicable, you can ask your current employer to transfer you to a part-time position or give you a consultancy job. In this way, you have a consistent stream of income while working on your business on the side.

5. Don’t drain your savings

When launching a business, it incredibly risky to give it everything you have, money-wise. Sure, it can be a high-risk, high-return kind of thing, but you can’t be entirely sure that your business will be successful right off the bat. There’s no way you can predict that.

Hence, when making an initial investment for your business, do not drain your bank accounts, no matter how confident you are in your idea. Even if your company does take off, your cash flow might still be inconsistent, and there might come a time that you have to put more money into the business. What will happen if your savings have been drained to zero? As you can imagine, nothing good.

6. Prepare for the worst

Although it’s never fun to think about worst-case scenarios, it is necessary when you’re about to start a business. Think about all the possible outcomes after your launch and what you will do if the worst happens. For example, if in case your business doesn’t succeed after you launch, what are the possible solutions that can address this problem before you lose your money?

Having Plan B to Z in place is a safety net in and of itself. You never know what can happen, but if you are prepared for the worst of the worst, the less impact there will be on your business in case you do run into trouble.

Starting a business is always risky. Although many circumstances are unforeseen and sometimes even unavoidable, having safety nets in place helps reduce the risk on your finances and your family’s future.