Finding the Right Savings Strategy for Your Preschool Business
As a business owner in the educational sector, particularly in the preschool industry, managing your finances effectively is crucial—especially when it comes to savings. A recent discussion with my business partner raised a significant question: how much should we really have set aside to ensure our operations run smoothly?
With our preschool expanding and the exciting prospect of building new schools and acquiring existing ones, the financial landscape is becoming more complex. Currently, our payroll amounts to roughly $75,000 per month for our eight-classroom facility. While we each take modest salaries, we also prioritize saving the remainder of our income. Our current approach allows us to maintain $100,000 in savings per school, following the distribution of excess funds at the year’s end.
However, this has led to some debate between my partner and me: is $100,000 enough, or should we consider keeping a full month’s expenses on hand at all times? In our line of work, unforeseen circumstances can arise—whether it’s related to staffing, maintenance, or other emergencies. Our plan is to contribute more capital if necessary, with the understanding that we’d reimburse ourselves from the savings once we stabilize again.
From my perspective as a small business owner, I understand the apprehension surrounding savings protocols. I’ve learned through experience that having an emergency cushion is vital. In an ideal scenario, having a more substantial reserve can provide peace of mind, especially considering unpredictable events like the pandemic. But let’s face it—keeping an excess of six months’ worth of expenses just sitting in a bank account feels restrictive. For our operation, that would exceed $700,000, a daunting figure for our savings strategy.
Therefore, I’ve decided to enhance our line of credit to provide us with additional flexibility while opting to maintain just one month’s worth of operational expenses in savings. My comfort level with this approach stems from the fact that I have substantial investments elsewhere, including over a million in the stock market and a fully paid-off home. This diverse capital access allows me to feel secure in choosing a more minimal cash reserve.
For those of you who may not have a similar financial background, I recognize that your situation might call for a different strategy. If I had started with fewer resources, I would probably recommend saving up at least two months’ worth of expenses in addition to securing a line of credit.
Ultimately, the right amount of savings will depend on your specific situation, risk tolerance, and the stability of your other financial resources. I appreciate all your insightful feedback and experiences related to saving for emergencies, and I hope this discussion helps others navigating the financial complexities of running a preschool—or any small business for that matter. Your thoughts on maintaining an appropriate savings balance can greatly benefit our community, and I’m eager to hear your strategies!
2 Comments
It’s great to see you actively engaging with your business finances and weighing the pros and cons of how much to keep in savings. Finding the right balance is definitely crucial, especially in a dynamic environment like the preschool business, where fluctuations can occur due to seasonal attendance, regulatory changes, or unexpected expenses.
When it comes to determining how much to keep in savings, there are a few factors to consider that could help you find common ground with your business partner:
1. Understand Your Cash Flow Needs
Analyzing your cash flow is essential. Given that your payroll is $75,000 per month, you can estimate what your total monthly expenses are, including rent, utilities, food supplies, and any other fixed costs. A common recommendation is to maintain at least three to six months’ worth of fixed expenses in a liquid savings account. Since your business model may have cyclical income (e.g., fluctuations in enrollment), having a safety net will help smooth out these dips.
2. Buffer for Business Expansion
As you expand, consider the additional expenses that come with opening new schools or acquiring existing ones. This could include renovation costs, additional marketing expenses to attract new clients, or higher operational costs. Having a robust reserve could cushion the impact of these investments on your cash flow.
3. Emergency vs. Investment Fund
It’s beneficial to separate your emergency fund from funds earmarked for future investments in the business. If a larger emergency arises (e.g., a lawsuit or sudden repairs), you want to be prepared without jeopardizing your expansion plans. Balancing the two—setting aside a sufficient emergency fund while also maintaining access to capital for investments—can help mitigate risks.
4. Access to Emergency Funding
You mentioned the idea of contributing more capital if necessary. Having an established line of credit is an effective strategy, as it can provide you with quick access to funds when needed without tying up cash that could be invested back into the business. Just make sure to have a clear agreement on how to manage the payback of those funds to avoid any conflicts down the line.
5. Consider Your Risk Tolerance
Your comfort level, which you have articulated well, plays a significant role in savings decisions. If both you and your partner have different risk tolerances, it might help to establish a defined savings policy that outlines how much to save after accounting for the projected risks you might face, as well as your current debt levels and investment portfolios.
6. Regularly Review and Adjust
As your business grows and external factors change, it’s important to regularly reassess your savings needs. Setting up quarterly reviews can help you and your partner stay aligned on financial decisions and adjust your strategies based on performance and emerging circumstances.
Final Recommendation:
Given your current setup, maintaining a minimum of one month’s expenses in savings is a reasonable starting point, especially if you have alternative assets or access to capital. However, setting a targeted savings goal based on your growth ambitions and potential market uncertainties (perhaps at least three months of expenses) might provide you both with the peace of mind you need while ensuring your business can weather any storms.
Ultimately, aligning with your partner on a well-structured savings strategy can foster a stronger partnership and create the foundation for successful expansion, while also providing the operational flexibility needed to navigate the unpredictable nature of running a preschool business.
Thank you for sharing such a thoughtful reflection on the challenges of financial management in the preschool sector! Your question about the right amount of savings provides an invaluable opportunity to discuss the balance between liquidity and investment.
Given the unique nature of your business, I would suggest considering a couple of additional factors that could guide your savings strategy. Firstly, while having a month’s worth of expenses in reserve may be suitable for your current comfort level, the dynamic nature of the education business—especially post-pandemic—may necessitate a more flexible approach. Creating a tiered savings strategy might serve you well: maintaining a core emergency fund (perhaps 1-2 months of expenses) for immediate needs while allocating surplus funds toward high-yield savings accounts or even short-term investments that align with your risk tolerance. This way, you’re not only prepared for emergencies but also ensuring that your excess cash is working for you.
Additionally, consider your cash flow cycles. Preschool enrollment can fluctuate throughout the year, meaning certain months might see higher expenses or lower income. Having a buffer that accounts for these cyclical variations can protect you during leaner months. It might also be beneficial to establish a detailed financial forecast that includes potential operational challenges, such as staffing shortages or unexpected maintenance costs, to help inform your savings targets.
Lastly, I love the idea of utilizing a line of credit as a safety net. Ensure you have a clear repayment strategy in place to avoid any potential pitfalls associated with accruing too much debt, especially during slower periods.
Ultimately