Are You Including This In Your Business Finances?

Do you have a line item for Retained Earnings in your business budget? If you don’t keep reading.

Retained Earnings (RE) is similar to a long-term emergency fund that you would have for your personal finances, but for your business. I recommend most businesses to have a 6 month minimum emergency cushion in their RE fund.

Where RE differs from a personal emergency fund is that it’s not only used for emergencies. It’s a large chunk of liquidity that serves several purposes. Some of these can include:

💰An emergency fund.

💰Capital to expand the business and launch a new product line.

💰Take advantage of opportunities in the marketplace, like buying a clinic, buying out a competitor, or buy up some extra inventory at a deal.

💰To pay out bonuses to yourself or staff.

My recommendation is to fund the emergency fund portion of your RE as quickly as possible. After that is funded, have a percentage of your businesses income AUTOMATICALLY put toward your RE fund every month. Meaning as soon as the money comes in, a percentage gets transferred to the account that holds your RE funds right away. This percentage is up to you. You can always start with as little as 1% then incrementally increase it every quarter or whenever you see fit. An even better approach would be to match the percentage you put toward RE with an equal percentage decrease of your expenses. Over time your RE fund will grow and since it’s on automatic you won’t feel the hit.

This could mean that you will end up with quite a bit of cash in the bank. Which means that you also can become your own line of credit and not have to rely on loans to get you out of trouble if they arise. This was particularly helpful during the pandemic. Businesses with large RE funds were able to get through without the hassle of applying for EIDL and PPP loans.

If you haven’t been including this practice in your business I recommend you get started on that today.