How to Create a Financial Cushion for Your Business in 6 Steps

Did you know that 80% of small businesses fail due to cash flow issues? Even with careful planning and budgeting, unforeseen costs, economic downturns, or seasonal slowdowns can disrupt your cash flow. That’s why building a financial cushion is essential—it helps your business stay resilient in tough times.

How much money should go into a financial cushion?

A general rule of thumb is to have enough savings to cover three to six months of operating expenses. This amount provides a sufficient buffer to manage immediate emergencies and allows you time to plan for your next steps. While it may seem like a significant sum, consider that 200,000 businesses were forced to shut down during the COVID-19 pandemic. Having a cushion can help your business stay afloat during uncertain times.

6 Steps to building a financial cushion

If you’re wondering how to begin, here are six practical steps to help you start building your financial cushion:

1. Decide on a savings model

One of the simplest ways to start is by saving a percentage of your monthly net income. This method allows your savings to grow, even during slower months, as it adjusts to your revenue flow. For businesses with seasonal revenue spikes, saving based on a percentage ensures flexibility.

The more disciplined you are about saving, the better prepared your business will be for unexpected challenges like equipment breakdowns or market fluctuations. Automating your savings by scheduling weekly transfers into a dedicated account ensures consistent growth of your cushion without having to manually intervene.

2. Calculate your recurring expenses

To know how much to save, first determine your monthly recurring expenses. Look closely at your budget, including commonly missed items like:

• Payroll (including benefits and bonuses)
• Insurance (workers’ comp, general liability, etc.)
• Marketing and software costs
• Rent, utilities, and office supplies
• Taxes and professional fees

Identifying these costs will help you prioritize expenses and understand exactly where your cushion funds need to be spent.

3. Identify opportunities for reducing expenses

Fixed expenses can quickly eat into your cash flow, making it harder to build and maintain a financial cushion. By strategically reducing overhead, you not only free up funds to bolster your reserves but also streamline your operations for long-term growth. Every dollar saved is a dollar that can contribute to your business’s financial security.

Here are several strategies to help cut costs and grow your emergency fund faster:

• Audit your software subscriptions. Consider consolidating services, downgrading to a lower tier, or canceling unused subscriptions. 
• Re-negotiate vendor contracts. Regularly revisit supplier and service provider contracts to ensure you’re getting the best value for your money.
• Shop around for insurance. compare rates on business insurance, including general liability, workers’ comp, and commercial vehicle coverage. 
• Cut energy costs. Implement energy-saving measures, like using energy-efficient lighting and appliances, or introducing smart thermostats..

By implementing these cost-cutting measures, you’ll create room in your budget to grow your financial cushion faster, while setting your business up for greater financial efficiency and resilience.

4. Practice efficient invoicing

Many small businesses struggle with delayed payments, especially when they allow customers too much flexibility with invoicing. By tightening up your invoicing process, you’ll improve cash flow and have more money available for your financial cushion.

Here are a few invoicing best practices:

• Set firm clear payment terms and deadlines. 
• Implement a system for prompt follow-ups on overdue invoices.
• Collect payments on time and charge interest for late payments.
• Identify and cut ties with clients who are consistently late or unreliable.

Improving your invoicing system will ensure that money comes in regularly, allowing you to save more efficiently.

5. Use a cashback credit or charge card

Cashback credit and charge cards offer a simple way to generate extra funds for your business. Every time you use the card for business-related expenses—such as office supplies, travel, or services—you earn a small percentage of the money back. This extra cash can either go toward paying off your card balance or be added to your savings fund. Over time, these rewards can add up, especially for businesses with high operational costs.

6. Always have a backup funding solution

Even with a solid financial cushion, it’s important to have backup funding options for emergencies. Look into flexible financing solutions like business lines of credit, invoice factoring, or services like Gravity Capital, which can provide quick access to funds in exchange for a percentage of your daily credit card sales. This will give you extra financial breathing room when unexpected costs arise.

Remain resilient in any economy

Creating a financial cushion is an essential part of running a successful small business especially during an uncertain economy. By following these six steps, you’ll be better equipped to handle emergencies, improve cash flow, and protect your business from financial uncertainty.