Why Your Small Business Needs a Reserve Account Now
As a small business owner, it's easy to get caught up in the day-to-day operations and focus on immediate needs. You're busy managing inventory, serving customers, and keeping the lights on. But what happens when an unexpected expense comes up, or when tax season arrives and you're not prepared? That's where a reserve account is your lifeline.
In fact, in my experience, one of the greatest causes of small business failures is not having a reserve account.
What Is a Reserve Account?
A reserve account is simply a separate bank account you use to save for future, non-recurring expenses. Think of it as your business's safety net. It's not for paying everyday bills like rent or payroll. Instead, it's for those big, inevitable costs that can sneak up on you—like quarterly taxes, equipment replacement, or unexpected emergencies.
The Problem with Not Having a Reserve
Without a dedicated reserve, many small business owners find themselves in a tough spot. When it's time to pay taxes, they might have to dip into their operating funds, which can disrupt cash flow and make it difficult to pay other bills. Or, if a critical piece of equipment breaks down, they might have to take out a high-interest loan or, in the worst-case scenario, halt operations until they can scrounge up the funds for a repair or replacement.
This kind of financial stress is not only bad for your business, but it's also bad for you. It can lead to sleepless nights and a constant feeling of being one step behind. Worse, without a Reserve Account you can find yourself on a helpless slide to financial failure.
Why a Reserve Account Is a Game Changer
Setting up a reserve account is one of the smartest bookkeeping moves you can make. Here's why:
Tax Preparedness: Tax season is often the biggest financial hurdle for small businesses. When you're consistently setting aside a percentage of your income for taxes, you eliminate the scramble. Instead of dreading tax time, you can approach it with confidence, knowing the money is already there.
Emergency Fund: Life is unpredictable. A sudden downturn in business, a natural disaster, or a major equipment failure can happen at any time. A reserve account acts as your emergency fund, providing a cushion to help you weather the storm without going into debt. It gives you the flexibility to handle the unexpected and get back on your feet quickly.
Financial Discipline: Creating a reserve account forces you to be more disciplined with your finances. By automatically transferring a set amount each week or month, you're prioritizing your business's long-term health. This habit will lead to a more stable and resilient business over time.
How to Get Started
Setting up a reserve account doesn't have to be complicated.
Open a Separate Account: The first step is to open a separate savings account specifically for your reserves. Don't mix it with your main operating account. This separation is crucial for clarity and prevents you from accidentally spending the money.
Determine Your Contribution: As a rule of thumb, a good starting point is to set aside around 20% to 30% of your profits for taxes and reserves. You can start small and adjust as you get a clearer picture of your business's expenses. Consult with a bookkeeper or accountant to figure out the right percentage for your specific situation.
Automate the Process: Make it a priority. Set up an automatic transfer from your operating account to your reserve account every time you get paid. This ensures you're consistently saving without having to think about it.
One of my favorite moves is setting up your account in a Money Market Fund - such as available with investment providers. I have mine with Fidelity because I like their terms, their check-like tools and the fact that I make more interest in my account then you likely will get from your bank’s savings or money market accounts.
By implementing this simple bookkeeping practice, you're not just saving money—you're investing in your peace of mind and the long-term sustainability of your business. It's one of the most effective ways to build a strong financial foundation and ensure your business is ready for whatever comes next.
Do you have a Reserve Account? Questions about Reserve Accounts or anything small business bookkeeping? Let me know.
