Navigating Savings for Your Preschool Business: Seeking Advice
When it comes to financial management, especially in the realm of small business ownership, the question of how much to keep in savings is a common debate. As someone who co-owns a preschool that’s currently in growth mode—expanding by constructing new facilities and acquiring existing ones—my business partner and I have differing opinions on this very issue.
With monthly payroll expenses hovering around $75,000 for our eight-classroom school, we each draw modest salaries throughout the year. The strategy we’ve employed is to retain around $100,000 in savings after distributing the remaining funds to ourselves.
This prompts an important question: Should we maintain at least an entire month’s expenses in our savings at all times? It’s prudent to prepare for unexpected situations where quick access to capital might be required, and our current arrangement allows us to contribute additional funds and pay ourselves back once we hit that $100,000 mark again.
Now, I turn to you, fellow small business owners: Is $100,000 a sufficient safety net?
After some feedback from my peers, I’ve gathered considerable insights about maintaining a buffer for emergencies. While I understand the philosophy behind having a more substantial savings fund, especially in light of unpredictable events such as a pandemic, I find it unsettling to keep an excess of six months’ worth of expenses—in my case, over $700,000—just sitting idle in a bank account.
As a plan of action, I am looking to increase my line of credit, which seems to be the most straightforward solution for now. I will also aim to keep one month’s worth of expenses in savings. My comfort level with this approach stems from the fact that I have over a million invested in the stock market, and my home is paid off, providing me with alternative avenues for accessing capital if needed.
Reflecting on my journey from two decades ago, when I lacked these safety nets, I would have certainly opted for a line of credit and aimed to save closer to two months’ expenses for peace of mind.
I truly appreciate all the advice and experiences shared by my fellow entrepreneurs in navigating these fiscal decisions. The dialogue surrounding savings is essential as we strive to safeguard our businesses while also fostering their growth. Thank you for your valuable insights!
2 Comments
It’s great to see you engaging with your fellow business owners on this important topic of financial management, especially considering the dynamic nature of the preschool business. Your concerns about maintaining sufficient cash reserves while also ensuring your expansion plans remain viable are valid and resonate with many entrepreneurs.
When it comes to determining how much money to keep in savings for a business like yours, there are a few key factors to consider beyond just the numbers. Here’s a comprehensive breakdown to assist you and your partner in reaching a mutually agreeable conclusion:
1. Understand Your Expenses
2. Assess Risk Factors
3. Review Your Growth Strategy
4. Evaluate Personal Financial Situations
5. Consider Industry Benchmarks
6. Establish an Emergency Fund
7. Run Scenarios
Conclusion
Balancing between saving enough to be prepared for emergencies and investing in growth is a delicate act that every small business owner has to navigate. In your case, starting with a month’s operating expenses and then evaluating based on your specific circumstances, growth plan, and industry norms is a pragmatic approach. Regularly reviewing your financial strategy as your business evolves will also help you and your partner align on savings goals.
If you continue to feel uncertain, consulting with a financial advisor specialized in small business can offer tailored insights and further assist in achieving consensus with your partner. Maintaining open communication about financial strategies will be key to fostering a productive partnership as you grow your preschool business.
This is a thoughtful discussion on an essential aspect of financial management for small businesses, especially in a sensitive sector like preschool education. It’s commendable that you’re considering the balance between having sufficient savings for emergencies while also investing in growth opportunities.
Your strategy of maintaining one month’s expenses in savings seems prudent, especially as you’re already diversifying your investments. It might also be worthwhile to consider seasonal fluctuations in enrollment that could affect your cash flow. Building a savings buffer that accounts for lower enrollment months or unexpected expenses can provide additional peace of mind.
Furthermore, I would suggest exploring options for high-yield savings accounts or money market funds that could generate some returns while keeping your funds accessible. This approach could help mitigate the discomfort of having a large sum “idle” in a standard account.
Maintaining a consistent dialogue with your business partner about financial strategies can also help ensure that both of your comfort levels with risk and security are aligned as you continue to grow your preschool. Remember, the right balance is unique to every business and its owners, so it’s essential to find what works best for both of you. Wishing you both continued success on this journey!