Dave Ramsey’s Entreleadership: Ask Dave

*Published with permission in the June, 2015 Newsletter*

Starting Small

Dear Dave,
I have no debt except for my house, and I have eight months of expenses in my emergency fund. I’d like to slowly start an online business while working my regular job, but even though I’m in pretty good financial shape, I don’t have much money left at the end of the month. How can I start my business without borrowing the money? – Kayley

Dear Kayley,
It’s simple. You start and run your business with cash. That should be a guideline for every entrepreneur. You’d be surprised how much cash will pile up over time, even if you save just a little bit each month.

Plus, you may have more money on hand than you think to get your idea started. Right now, you’re a little heavy on your emergency fund. I recommend people have three to six months of expenses set aside for emergencies. You could back your emergency fund down to five or six months of expenses and move the extra over to an account designated to getting your business off the ground. After that, you grow it a little bit each month until you have enough to open your doors.

The big thing, Kayley, is don’t be afraid to start small. Some of the best and most successful companies in this country started as cottage industries or micro-businesses. I started my company on a card table in my living room, and there’s nothing wrong with that kind of beginning. It’s easier and safer in a lot of ways, and it doesn’t take a lot of money. So, I love your wisdom in wanting to start slowly online while keeping your full-time job.

My advice would be to take about two months of expenses out of your emergency fund and move it to a little business account. Then watch your budget and think carefully about your spending. You’re already a person who’s in control of her money, so I think you’ll do a good job growing this business.
Remember: no debt, use cash and grow slowly. There’s no shame in any of these things. The best, most successful businesses don’t outrun their money and other resources!

Setting up a Small Business Emergency Fund

Dear Dave,
How do you set up an emergency fund for a small business? -Eric

Dear Eric,
In business, we would name it a little bit differently. Instead of an emergency fund, we’d call it “retained earnings,” but it’s still the same thing. Retained earnings serve several purposes. They could act as an emergency fund, or they could be used to expand the business and launch a new product line. You could also use retained earnings to take advantage of opportunities in the marketplace. This means you could buy out a competitor or buy up additional inventory at a great price.

All businesses have cash needs to stay open and keep moving forward. Your retained earnings could easily be a pretty large account. Of course, you can keep them in a simple business account. That’s not a big deal. But in terms of the amount of retained earnings, I wouldn’t be in panic mode if I didn’t have three to six months of expenses like with an emergency fund in personal finance. That could be a lot of cash, but then you’d be acting as your own credit line too.

That’s how I would do it, Eric. Open an account, call it retained earnings and let that one big chunk of liquidity (that big pile of cash) serve several of your business needs—including the need to stay out of debt!

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