Imagine what your life as a business owner would feel like if you had a bank account with funds at the ready in case things went really, really wrong for three, four… or six months. How would that affect your ability to sleep at night? If you’re like me, it would bring a great deal of peace to your life. So let’s talk about this account and how business owners just like you and me are making it a reality.
I want to introduce to you another Profit First bank account – the Vault.
An Overview of the Vault
Whereas the Profit account is what I consider to be a rainy day fund, the Vault is a long term cash reserve account. In personal finances, Dave Ramsey’s Total Money Makeover and Financial Peace University refer to this as an Emergency Fund.
This idea of the emergency fund isn’t just critical for families; it’s absolutely essential for running a business. Every company should have a cash reserve. It’s ideal to have a cash reserve to operate the business for three to six months if all sales were to stop completely. It would be a rare occasion that all sales stopped at once so this amount could actually last your business a very long time during an emergency.
Why You Need a Vault
Unexpected events happen. You cannot predict the future. It’s not a question of IF an unexpected event will happen, but when. Examples:
- A sharp downward trend in market conditions.
- Your largest client goes bankrupt.
- A key employee leaves.
- You become sick and have to be out for a long time.
How to Create Your Vault
You will actually create your Vault from part of the money in your Profit Account. So first, let’s review Profit Distributions: During each month, on the 10th and 25th, you have been making allocations to your profit Account. That money is out of sight and out of mind in that separate Profit Account. It’s even at a different bank where it’s more difficult for you to see and access the funds. At the end of the quarter, you will take a Profit Distribution- 50% of what is in the Profit Account. We strongly encourage you to take that Profit Distribution and CELEBRATE the business’ success with it. Whether it’s a trip to Disney World or going out to dinner for pizza with your family, we want you to enjoy the fruits of your labor and the profit from the business you have grown!
What’s left in the Profit Account can be called sediment. This sediment is what is used to fund your Vault. How much is used to fund your Vault, and how aggressive you want to be as you build up your cash reserve is entirely up to you! Once the Vault is fully funded, it’s important to keep track of the amount. (As your business continues to grow, your vault will need to continue to grow as well.)
When you take money from the sediment in your Profit Account and move it to your Vault account, keep in mind that this will lower your future Profit Distributions. How aggressively you want your vault to grow will directly affect how much you can take in Profit Distributions.
You should target to build your Vault account over the course of a year. In reality, it’s more typical for it to take one to two years to completely build a Vault. Because you will need only very infrequent access to this account, it would be good to open a low interest earning account for the Vault.
Rules for Your Vault
You need to create your own set of rules for your Vault. These rules will govern when and how much you can take out, and for what reasons.
These rules must be written and should be made well in advance of a time when you might need access to the Vault.
The Vault rules need to be established before you need to access it and not in a time of crisis. The rules you create are important decisions to make, and crisis time is not the time to think about critical decisions.
As a good rule of thumb, the only time you should access the funds in your Vault is in a time of great change and crisis in your business. If you are accessing your vault, you need to be making changes in your business. For example: reducing expenses, reducing payroll, etc. The Vault is your last resort.
In conclusion, the Vault acts as a buffer. It’s a defense or shield against unexpected events. The Vault may be the difference in whether your business survives a crisis or not. It will prevent you from shutting the doors or having to take out a huge loan to survive. (Loans like this often cripple the business going forward as it attempts to recover AND eradicate debt. Often, this simply proves to be impossible.)
It’s crisis prevention that keeps us away from survival cycles and allows us to make decisions for long term viability and permanent profits.
Having a Vault will change the way you make decisions. It will give you the power to be more strategic. By the way, that’s the nuts and bolts of Profit First – taking action to be strategic and plan ahead.
- Profit Account = Rainy day account for short-term emergencies or extremely slow months.
- The Vault = Long-term emergency fund in case things get really tough.