Emergencies do happen, and while they may range in scale and scope, business leaders and individuals alike are caught off guard in the chaos. The scary fact is that whether an incident is natural or human-caused, if you’re unprepared, your business and even personal well-being could suffer.

An emergency fund is money set aside as a cash reserve for your business. You can use a reserve to meet those unplanned financial needs without incurring debt from a credit card or loan. Most financial experts suggest that cash reserves cover three to six months of expenses.

Developing an emergency fund is a preemptive step that will pay off immediately when any disaster occurs. Not only can it help save on recovery costs and expedite the return to normalcy, but it will also provide you with peace of mind.

Let’s look at ways you can start planning and creating an emergency fund for your small business.

• Identify Core Expenses: The first step in building an emergency fund is looking at how your business regularly spends money. Ask yourself what the biggest costs are for keeping your business running. Perhaps it’s staff salaries, technology costs, product supplies – the list goes on, but what’s important is that you identify the most vital expenses. It may even help to categorize expenses as primary, secondary, and non-essential.

• Start Setting Money Aside: Reducing spending on some of the non-essential expenses can free up funds for the emergency fund. You can also take advantage of busy seasons or periods of high profitability to set money aside for emergencies.

• Consider Opening a Separate Account: Opening a separate bank account for your emergency fund will do a couple of things for you right upfront. For one thing, this eliminates the risk of your emergency money getting mixed in with other funds. Having a separate account will also make it easier for you to monitor the rate of savings towards your goal.

Need a trusted advisor to review your financial plan? KG Virtual CFO offers part-time virtual CFO services for businesses in need of advanced financial support and direction.