How To Develop Financial Resilience

inancial ups and downs are a normal part of business. You may have a surge of revenues one year, only to see them decline the next. Or, you may encounter business expenses you weren't expecting. While such times can be trying, learning how to develop financial resilience can help you weather the storm and emerge stronger than before.

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Financial resilience: a definition

Financial resilience is the ability to overcome challenges that impact your company's revenues, income, or assets. Some difficulties might be minor, like needing to replace an outdated computer. Others might be much more serious, such as losing a significant customer. While you can't anticipate every obstacle, there are steps you can take to protect yourself and your business.

When you're financially resilient, you take each setback in stride. You have a buffer to protect yourself when things don't go as planned. You may experience some turmoil, but you know you'll endure the tough times and move on with your plans.

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How to develop financial resilience in your business

Achieving financial resilience takes time and planning. However, the reward is worth it. You'll have far less stress knowing you can push through an unexpected financial setback when it happens. Here are some actions you can take to make financial resilience a reality for your business.

Set financial goals

Think about what you want to accomplish in your business. That includes the short-term goals you want to achieve within the next year and the long-term goals that reach further in the future.

Establishing financial goals often depends on the development stage of your business. A startup might focus on attracting a few initial customers or building an emergency fund, while a more established business might look to increase profit margins or expand to a new location. Wherever your business is in its journey, identify relevant goals that you can work toward.

You might have heard of the SMART process of goal development. SMART is an acronym for specific, measurable, achievable, relevant, and time bound. Here's the definition of each SMART attribute:

• Specific: A specific goal is clear-cut and definitive. You know precisely what you want to achieve and make it known to other business stakeholders.
• Measurable: A measurable objective can be easily assessed. You can use data and metrics to see whether you're on track or need to make strategy adjustments.
• Achievable: An achievable goal is attainable. It's not too far-fetched—you know you can reach it if you try.
• Relevant: Your goal should align with your long-term vision for the company. You may need to establish multiple goals to meet your long-range objectives.
• Time bound: Setting a date to achieve your goal instills a sense of urgency. Determine when you'll start working toward the goal, when you want to reach it, and any key milestones to attain along the way.

As you identify various financial goals to work toward, use the SMART process to outline the steps to achieve them. That way, you can track your progress and hold yourself and your team accountable for the results.

Establish an emergency fund

It helps to have some savings set aside for unexpected expenses. The U.S. Department of Labor advises consumers to have at least three to six months of living expenses for unforeseen events, such as a job loss or expensive car repairs. You can take the same approach to your business.

Add up your typical monthly expenses to determine how much you need in your business emergency fund. Include all the costs you typically pay, including office rent, vendor payments, payroll, and your own salary. Then, multiply that by six. The total should equal six months of expenses, which you can aim to set aside in savings.

For example, assume your business has $10,000 in monthly expenses, including equipment costs, payroll, and supplier payments. You also pay yourself $6,000 in salary as the business owner. Your total business expenses are $16,000 monthly. To meet the six-month savings rule, you need to set aside $96,000 in your business emergency fund. You can comfortably save $1,500 each month to meet your goal.

With the SMART process, you can set yourself up for success. Here's how to make it happen:

• Specific: Your goal is to establish an emergency fund with $96,000.
• Measurable: You can open a savings account for your emergency fund and monitor your balance as you work toward your goal.
• Achievable: Your goal is reasonable. You've determined you can put aside at least $1,500 monthly to reach your savings objectives.
• Relevant: Establishing an emergency savings fund aligns with your strategy of developing financial resiliency for your business.
• Time bound: ⁠⁠⁠⁠⁠⁠⁠If you stick to your savings plan, you'll reach your emergency fund goal within 64 months at the latest. You can establish specific milestones—such as saving $15,000 within 10 months—to avoid goal fatigue and maintain motivation. 

Once you have an emergency fund, you're better prepared to deal with any financial emergencies. You can take care of unforeseen expenses using the money from your savings rather than taking on unnecessary debt.

Manage your debts

Many businesses incur some form of debt, such as credit cards or loans, for financing purposes. 

Whatever type of debt your organization has, managing your payments is essential. Ensure you pay your bills by the due date to avoid penalties and late fees. As you build your reputation as a reliable borrower, you'll find it easier to obtain future financing when needed. 

While having some debt is normal for most businesses, it's important not to overextend your company. If you find it challenging to meet your regular payments, it's a sign that your organization may have too much debt. You can use the SMART process to reduce debt balances and regain financial control.

For instance, assume you have a $20,000 balance on a business credit card with a 20% APR. You're making your minimum monthly payments of $300, but you'd really like to get out from underneath the credit card and curtail your interest costs. You decide you can reasonably afford to make $1,000 monthly payments to pay off the debt more quickly. If you stick with your goal, you'll pay off your debt in less than two years—much faster than you would with $300 payments.

Establish an accounting process

If you don't already have one, set up a system for monitoring your business finances. Track your revenues, expenses, and other financial activities using proper accounting software. If accounting isn't your thing, or you can't find the time to handle it, consider hiring a consultant or employee to manage your finances for you.

An efficient accounting process makes monitoring your cash flow and business expenses easier in real time. You can review your monthly financial statements, including balance sheets and income statements, to track your business performance and determine if adjustments are necessary. 

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Becoming financially resilient benefits your business

Whether you're a new business owner or an established one, there's no doubt that financial resiliency can benefit your organization. Start by setting a few financial goals, then use the SMART method to outline your process to meet them. Some typical financial goals include building an emergency fund, establishing an accounting system, and managing debts. With the right mindset and a clear plan, you'll become financially resilient in no time!

Are you interested in a business banking solution that caters to startups and solopreneurs? Check out Novo's business banking services. Our business bank accounts have no monthly fees or minimum balances. Plus, you can use our analytics to monitor your company's income and expenses in real time.

Novo is a fintech, and not a bank. Novo acts as a service provider to Middlesex Federal Savings, F.A., and the deposit and banking products obtained through the Novo platform are provided by Middlesex Federal Savings, F.A.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

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