UK Savings Week aims to get the nation to kickstart their savings journey or enhance their existing savings strategies. At Recognise Bank, recognising our customers and their specific needs is at the heart of what we do. This Savings Week, we are exploring how small businesses can adopt some of the same principles to build positive savings habits that will help their businesses to grow and thrive.
We spoke to Rhys Hughes – CEO at Best Business to find out more about how an emergency fund can be a useful savings tool for small businesses to get the most out of their money.
RB: Why is it important for businesses to have an emergency fund?
RH: An emergency fund is essential for businesses because it provides a financial buffer for unexpected events or disruptions, like economic downturns or sudden client losses. Having this reserve means businesses can keep running, pay their bills, and avoid taking on high-interest debt when things get tough. If recent events have taught us anything it’s that we should be prepared for the unexpected.
How can businesses build up an emergency fund?
Businesses can start building an emergency fund by setting aside a small percentage of their monthly profits into a separate savings account. It’s also a good idea to regularly review spending and cut back on non-essential expenses and potentially add those savings to the fund.
What challenges might they face while doing so, and how can they overcome them?
One challenge businesses might face is cashflow issues, which is often the case for startups or low-margin industries. To deal with this, businesses can start small, making manageable contributions to the emergency fund and increasing these amounts as they get more financially stable. The main thing is to get into the habit of saving consistently.
Where should businesses keep their emergency fund?
Businesses should keep their emergency fund in accounts that offer a good balance between earning interest and having easy access. High-interest savings accounts, money market accounts, or short-term fixed deposits (think notice or small fixed term accounts) are good options. The idea is to have funds that are accessible when needed but also earn some return in the meantime.
What are the key things a small business should consider when setting up an emergency fund?
A few things that small businesses should consider is how much they are aiming for in the fund and how long they want it to last. Some things could change these considerations, like the business’ cashflow volatility, industry-specific risks and access to credit.
It’s also wise to spread your savings as banks can only guarantee protection up to £85,000 in an account (per banking group), due to the Financial Service Compensation Scheme (FSCS).
How much should businesses aim to save in an emergency fund?
Generally, businesses should aim to save enough to cover three to six months worth of operating expenses. This can vary depending on how stable the cashflow is and the type of business.
Does this differ across industries or sizes?
Yes, it does. Industries that experience high volatility, like hospitality or construction, might need larger emergency funds, setting aside 6 to 12 months of expenses might be more appropriate.
How do most businesses manage their money, according to Best Business data?
This has changed a bit over time but when the Bank of England base rate started to increase we saw a jump in overall interest in business savings and saw a lot of attention on fixed-rate accounts because they could offer the best rates at the time. As the base rate continued to increase we saw more businesses looking at variable-rate accounts and at its peak (5.25%) it appeared to be a healthy split of fixed-rate and easy access accounts. Now there is more uncertainty of the base rate’s stability and the first reduction in almost a year. We are seeing businesses show more interest in easy access accounts to manage their savings, but we have also seen banks pushing their easy access accounts more recently.
How has this changed over time? What impact have we seen from COVID, recent geopolitical events, recent BoE base rate reductions, etc.?
Over time, there’s been a noticeable shift towards digital banking solutions, driven by the need for remote access and efficiency, but also because interest rates offered by challenger banks tend to be more than high-street banks. Covid and lockdown sped up this trend and saw the start of the Bank of England base rate increasing from a measly 0.25% back in December 2021. Recent geopolitical uncertainties and changes in the Bank of England’s base rate (reduced last month for the first time in almost a year) have led businesses to look for more flexible financial products and spread their banking relationships (i.e. opening multiple accounts across banks) or looking at variable-rate accounts to reduce risk.
Are there any tools, resources, or financial products you’ve seen that can help businesses manage their money more effectively?
Having a clear overview of your business’ expenses can be one of the best ways to manage money more effectively. A couple of ways businesses could do this is with accounting software and financial dashboards, offering real-time insights.
Businesses could also take advantage of savings features, like automated savings pots where you can regularly set aside a portion of income every month, helping to build a savings habit without needing to do it manually.
I also think the rise of cash management platforms are an incredible way to manage business money as they allow for quick and easy movement, bespoke interest rates that tend to be higher than standard business accounts and all your money is kept in one place.
Recognise Bank’s vision is to be the UK’s best business bank, offering customised lending and savings solutions. For more information about how Recognise Bank can help your business build an emergency fund, visit our website to learn about our variety of savings products: www.recognisebank.co.uk/business-savings-accounts/
Best Business is on a mission is to help you to compare with confidence so that you make the best business decisions every day, whether you are a new or established business. For more information on business savings accounts,
visit: https://www.bestbusiness.co.uk/business-savings-accounts/
