How Much Should Your Business Keep in Savings? A Preschool Owner’s Dilemma
As a preschool owner navigating expansion and growth, I find myself in a bit of a debate with my business partner. We’re building new facilities and acquiring existing ones, a venture that certainly calls for strategic financial planning. One of the pressing issues we face is determining the right amount to keep in our savings account.
Currently, our monthly payroll for an eight-classroom school amounts to about $75,000. Both my partner and I take modest salaries, and we tend to set aside the rest of our profits throughout the year. We typically keep $100,000 in savings and distribute any additional profits among ourselves at the end of the fiscal year. This arrangement is consistent for each school we manage.
However, I can’t shake the feeling that we may not be saving enough. Is maintaining $100,000 really sufficient, or should we aim to have an entire month’s worth of expenses tucked away in reserves at all times? If an unexpected financial need arises, my partner and I could contribute together, then gradually replenish the account once we hit that $100K mark again.
I’ve reached out to fellow small business owners for their insights. Many suggest that having a solid savings cushion is essential for handling emergencies—especially in the unpredictable wake of events like the COVID-19 pandemic. Yet, I’m hesitant about letting six months’ worth of expenses idle in a bank account. For my situation, this would total more than $700,000, which feels excessive given my current financial landscape.
What I plan to do is increase my line of credit, which seems like the most practical step at this moment. For now, maintaining a reserve of one month’s expenses feels manageable. It’s important to note that I’m comfortable with this approach because I also have significant investments in the stock market and my home is fully paid off, providing me alternative avenues for accessing capital if necessary.
Reflecting on my early days in business twenty years ago, when I didn’t have such financial cushions, I would have likely aimed to save two months’ worth of expenses—alongside a line of credit—just to ensure security.
I genuinely appreciate all the feedback I’ve received so far, and it’s encouraging to have advice from those who understand the nuances of running a small business in times of uncertainty. How do you approach savings in your business?
2 Comments
It’s great to see that you’re actively seeking advice on the financial health of your preschool business, especially during a significant period of expansion. Balancing savings with operational needs is crucial, and it sounds like you’re already on the right track by engaging in this discussion.
Assessing Your Savings Needs
Determining how much money to keep in savings can vary significantly depending on your specific business model, anticipated growth, and risk tolerance. Here are some considerations to help you navigate this complex decision:
Understand Your Operational Costs: While your payroll is a major expense, be sure to account for other operational costs, including utilities, supplies, maintenance, insurance, and unexpected expenses that may arise. A careful analysis of these costs will help you gauge how much you truly need for a financial cushion.
Industry Benchmarks: In the realm of early childhood education and preschool operations, many businesses aim to maintain between 2 to 6 months’ worth of operating expenses in a liquid savings account. While staying on the lower end may be tempting to maximize available capital for expansion, consider the volatility that can come with unexpected events—such as turnover, regulatory changes, or economic downturns.
Expansion Considerations: As you’re in a growth phase, it’s prudent to keep a cushion to address potential delays in revenue from new schools, unanticipated renovation costs, or increased expenses as you scale. Remember, the cash flow during growth periods can be unpredictable, and having sufficient savings can alleviate stress during these times.
Access to Capital: As you mentioned, a line of credit can be a valuable tool. Consider using this as a backup rather than your primary source of funds. Keeping one month’s expenses in savings is a reasonable approach if you supplement it with a credit line. However, balance it with the fact that a line of credit usually involves interest that can add up if not managed wisely.
Flexibility in Contributions: If your partnership structure allows for it, consider setting up an agreement that permits periodic reviews of your savings strategy. This way, if your business revenues increase post-expansion or you encounter a profitable quarter, you can adjust your savings rate accordingly.
Practical Steps
Review Monthly Financials: Regularly review your financial statements and cash flow reports to assess whether your current savings strategy is meeting your needs. Utilize tools like QuickBooks or other financial software tailored for small businesses to keep track of these metrics easily.
Emergency Fund Goals: Define what constitutes an “emergency” for your business and align your savings strategy accordingly. For some, this may be as simple as being able to cover payroll during slower months. For others, it might include having ready cash for immediate repairs or staff training.
Contingency Planning: Lastly, create a contingency plan for various financial scenarios—growth opportunities, economic downturns, or unforeseen emergencies. Having a structured approach to these might ease tensions between you and your partner regarding savings amounts.
Conclusion
It sounds like you’re in a unique position with both personal and business financial security, which gives you some flexibility in your savings strategy. However, finding a middle ground with your partner on an amount that feels sufficient is crucial for maintaining peace in your business relationship. Perhaps compromise on a gradual increase in the savings buffer, aiming first for two months’ worth of expenses while keeping the credit line as a safety net. Communication, clarity, and a clear financial strategy will be your best allies as you navigate this stage of growth.
This is a thought-provoking discussion about the balance between savings and growth in a business, especially in such a critical sector like preschool education. One approach I’d suggest considering is the “buffer stock” methodology, which can complement your current strategy.
While maintaining one month’s worth of expenses as a reserve makes sense in terms of liquidity, think about adding layers to your savings strategy. For example, you might categorize your savings goals: have a liquidity buffer for immediate operational needs, but also establish a separate fund for growth opportunities or emergency expenses that could arise after your immediate liquidity needs are met.
Additionally, you mentioned the concern regarding keeping a large amount idle in a savings account. You could explore high-yield savings accounts or other low-risk financial instruments that allow you to earn interest on your savings while still keeping access to those funds relatively quick. This way, you’re not just sitting on cash but also ensuring it’s working for you.
It’s also crucial to review your financial data regularly, taking into account the ebbs and flows of your business cycle. If you anticipate periods of slower enrollment or unexpected expenses, it might be wise to err on the side of caution and maintain a larger cushion during those times.
Lastly, having a thorough discussion with your partner about your risk tolerance and future business goals will help you both align your savings strategy with the broader vision for your preschool’s growth. This open dialogue can foster a better understanding and lead to a balanced approach fitting both of your perspectives.
Wishing you both