In this guest post, Caroline McDonald from SME-focused bank Aldermore explains how SMEs can get the best return from a business contingency fund.
When circumstances threaten to affect a business’s cashflow, having a contingency fund in place could be the difference between success and failure.
There are a number of different things that can affect a company’s cash flow, such as seasonal fluctuations, unexpected orders and overdue invoices. In fact, recent research from Bacs Payment Schemes estimated that UK SMEs are spending an average of £955 a month chasing unpaid invoices. Without any financial safety net in place, many small businesses would struggle to get past obstacles such as these.
In order to safeguard their company’s future, many business owners will save towards a contingency fund.
How big should a contingency fund be?
The amount a business is able to save can vary depending on a number of factors, including the industry they are in, what they constitute as an emergency situation, and when and how they would need to access their contingency fund. Despite this, most experts agree that businesses should aim to maintain a contingency fund of a minimum of three to six months’ worth of operating expenses.
All basic costs need to be accounted for, such as rent, utilities, payroll, insurance premiums and any other regular payments a business has. After this, it is also worth considering any non-essential but still valuable expenses, such as additional staff training.
SMEs aren’t making the most of their money
Worryingly, despite the importance of having a contingency fund to provide a layer of financial protection, many SMEs are not putting their money into savings accounts. An Aldermore study found that 69 per cent of SMEs are currently operating without a business savings account.
To make matters worse, many businesses that are contributing to a savings account are unaware of how much interest their money is earning, and could therefore be missing out. Another piece of Aldermore research found that a quarter of SMEs that are saving don’t know what interest rate they are receiving and a further 23 per cent said they are receiving no interest at all.
In light of these findings, Aldermore created the SME Rate Checker to help businesses get the interest they deserve on their savings. The SME Rate Checker tool allows businesses to check the interest rate they are currently receiving on their surplus funds and compare those to the rates they could earn with Aldermore. Research has shown that the average interest rate received on surplus funds is 0.6 per cent.
Once a business has an understanding of what different rates are available to them, they are better placed to transfer their contingency fund to an account where it will earn a higher rate of interest and continue to grow while not in active use.
Speaking about the findings Simon Healy, Managing Director of Savings for Aldermore said:
“It is clear many SMEs are not getting the most out of their surplus funds. While the interest rate should be the first thing you should know about your account, businesses regularly tell us that it really isn’t as straightforward as it should be to find out what they’re earning.
“To those businesses who don’t know their rates or who don’t shop around, I urge them to take just a few moments to take a look. With our SME Rate Checker, it is easy to do in moments what can sometimes be an onerous task with some providers.”
He continued: “We believe it should be really easy for customers to find something as fundamental as the interest rate they are earning on their spare cash. This is why we’ve teamed up with Savings Champion to offer the UK’s first SME Rate Checker tool, to make it as easy for SMEs banking with any provider to find the rate they’re earning on their hard-earned cash as it already is for Aldermore customers.”
While businesses may hope that they never find themselves in a position where they need to access their contingency fund, having one in place provides both peace of mind and financial security should the unexpected occur.
Founded in 2009, Aldermore is a modern, SME-focused bank which challenges the established view of what banking should be. They deliver award-winning business finance, mortgages and savings to Britain’s SMEs, homeowners and savers.