A business 'War Chest' - is it a good idea?

[Devan]

I have been in business for over 15 years now, but it has only been in the recent two years or so (since going back to working solo actually), that I have put some money aside into a separate bank account as a 'war chest'.

The main purpose of this fund is really to allow me to take large chunks of time away from the business, and still be able to keep up the fixed expenses without relying on me generating new income.

At present, I have nearly 3 months of fixed expenses put away, but I want to get it up to approx. 6 months worth soon.

Problem is, that a lot of colleagues, clients etc. tell me that this is a silly idea, and that the money could be fed back into the business as working capital, or used in some other way immediately.

I am interested to hear all your opinions on this - do you think having a reserve of funds just 'sitting' there is a good idea, or should it be put to more productive use now?

Cheers,
Devan

[gregpritchard.virtualcio]

Devan, mate, you're crazy!

Are you sure you want to be:
- Putting money aside to allow you to do what you want in your own life?
- Giving yourself peace of mind in that you have a buffer for future plans?
- Having access to your funds in an isolated, low-risk account?
- Making decisions about what you think is best for your business?

Some businesses need to be investing for future growth, some need to cut costs, some need to move capital from loss-making projects/initiatives to more profitable ones. You need to make the decisions that are right for you.

Only suggestion might be to put it into a Cash Management (CMT) account which is paying a little more interest than a regular transaction account [this is not investment advice, consult your own advisor, make your own decisions, etc].

Tell the detractors to go jump Devan. Its not always about the money, the ROI, or the business productivity. Peace of mind doesn't have a price.

[Devan]

Greg,

Thanks for your reassurance!

I forgot to mention, that I have the 'war chest' funds in an ING Savings Maximiser account, which was earning me a nice 8.5% but has now dropped back to a miserly 4% or something.

I didnt want to lock it away in fixed deposit or bonds etc. as I needed 24 hours access for emergencies etc., but the ING accounts seems to work fine!

Cheers,
Devan

[peppie]

No I don't think you are silly. I have heard it said plenty enough that it is wise to have at least 3 months worth of overheads spirited away at any time.

Business income is never consistent and without a buffer you risk going under with an unexpected dip in income. I guess the trick is to try and guesstimate how long that dip might last, given the type of business you are in and the state of the economy etc. etc..

[BB]

Hey Devan -

Commonsense will always prevail.

Methinks you've got plenty!

The people who tell you to do something other than what you're doing are possibly feeling guilty that they don't have the discipline or determination to do the same.

Keep on keeping on...

B.B.

[Wild Purple]

Devan,

You're probably one up on most small businesses at the moment... in these times of financial crisis, it is interesting to see what comes from so-called experts.

I think you are right in keeping a war chest, and I am in the process of building my own... why? because while my business is doing reasonably well at the moment... cash flow is key with the market the way it is, and the only way to ensure you have funds to maintain cash flow, is by doing exactly what you have done - create a ready reserve (it's a bit like the Army really), just in case... that way if things do go quiet, you have the funds to ride the wave as it were...

Having said that, I am also advertising and marketing my business, because businesses that don't cut their marketing budgets, and continue to advertise will come out the other side of the recession looking like they were market leaders, even if they weren't - because it's all about perception.

[Devan]

Paul, B.B., Mark,

Thanks for your input - it is nice to see some positive feedback to this, and some confirmation that I am on the right track. I must admit that for the first decade or so that I had my business, I never gave a thought to having 'business savings'.

It was only when I scaled down, moved the business back home and brought my wife onboard as office administrator, that she turned to me and asked "Why hasn't the business got any savings?!". This from a lady who has never run a business!

Just goes to show, sometimes the smart ideas don't have to come from the experts!

Cheers,
Devan

[Burgo]

I was asked by our members what I was doing with their membership fees.
So i explained that after expenses I put the remainder into a direct debit account (like ING) which earned higher interest.
Then asked why they were not doing the same.
Surprising how many had not heard of such an account or had not thought of puting their hard earned money into a high interest savings account linked to their main business account.
Most banks have such accounts.
Treat it as a super account that you can access, put a small mount away each week and try not to use it and before long you will have a neat little nest egg. In fact it is better than super at present because with super you are feeding a black hole, where as cash will still give you around 4% build this up and when super starts to go in the right direction you will have something to invest.

When i had a mortgate I used this as my savings account I would pay off as much as I could and when I needed some money I would just redraw some out.

If you havent got a high interest savings account then what are you waiting for a small amount each week $ 50, $ 100 what ever you can afford and watch your money grow.

[LeelaCosgrove]

Devan,

At the end of the day, it depends ... do you have enough working capital? Are you investing in new marketing and sales techniques?

It's important to have money tucked aside - but it's also important that you feed your business what it needs to survive ... cash.

If you're NOT investing in marketing and sales, then you need to think about taking a percentage of your savings and placing it into smart, educated techniques. Not ALL of your savings - but a percentage. If your business isn't growing, it's dying.

Because it's great to have money behind you - but if your business carks it what good will it do you?

[Burgo]

If you're NOT investing in marketing and sales, then you need to think about taking a percentage of your savings and placing it into smart, educated techniques. Not ALL of your savings - but a percentage. If your business isn't growing, it's dying.

That too, so you need to be able to balance both