Emergencies, by nature, are unpredictable. Untimely repairs, natural disasters, security breaches, prolonged power outages, and economic recessions can all put you on a financial strain if you are not prepared.

While these situations cannot always be avoided, having emergency funds can lessen the burden of dealing with them. In this article, we will discuss further what constitutes an emergency and how financial modeling and analysis can help you prepare for them.

Natural Disasters

Floods, earthquakes, fires, hurricanes and thunderstorms can result in damage to your property, inventory, or even power outages. It can halt your operations, eventually drain your resources and possibly put you out of business.

Prolonged Power Outages

Depending on the size of the business and the industry it is in, power downtime can cost anywhere from $10,000 to over $5 million per hour. It not only affects ongoing business operations but can also damage your appliances, shortening their service life.

Emergency Repairs

Untimely repairs occur when a critical system malfunctions or your equipment breaks down. While planned preventive maintenance efforts can keep such emergencies to a minimum, one cannot rule them out altogether.

Security Breaches

According to the IBM 2020 Cost of Data Breach Report, a data breach costs an average total of $3.35 million. This breaks down to $163 per lost or stolen record. Many businesses that face a data breach end up losing revenue. Those that make it to the headlines are also at risk of a damaged reputation, leading to lost business and competitive advantage.

Economic Recessions

In 2020, we experienced an economic downturn, high unemployment, falling average incomes, and business shutdowns. If the past year has taught us anything, it’s that even the most successful businesses encounter emergencies that are beyond their control.

The lack of available funds can be an obstacle to businesses as they try to survive a Black Swan event like the COVID-19 pandemic. It can spell a quick end for small businesses, which are evident in the many that have shut down in Australia. It further demonstrated the value of having emergency funds to continue operations even while completely or partially closed.

How to Prepare for an Emergency

Having cash set aside for these emergencies is an essential component of a strategic financial plan.

You can build a financial model, which estimates the costs of operating your business and its projected profit. A financial analyst can also use this data in cash flow forecasting, calculating expenses, deciding on budgets, and allocating resources—emergency savings included.

An emergency fund is key to keep your business afloat in such unprecedented situations. You can also use it in any other circumstance where your revenue is less than your expenses. However, keep in mind that you should not overfund it when you could spend the money more wisely on other purposes.

Regarding how much you should allocate for your emergency fund, financial analysts suggest 3-6 months’ worth of your revenue to cover your operational expenses during the short-term. You should also factor in the specifics of your situation—the number of your employees, and rental, among other financial responsibilities.

Takeaway

Save your emergency fund to offset the expense of an unforeseen situation—natural disasters, power outages, emergency repairs, security breaches, and economic recessions. This fund serves as a safety net, which you can only tap for expenses directly related to an emergency.

When you withdraw money from this fund, make sure to replenish it immediately so it can sustain your needs in case the next emergency occurs.

What are your thoughts about these emergencies and having an emergency fund? Let us know by leaving a comment below!