When most people think about the benefits of saving money, the first thing that comes to mind is the interest – the allure of the “time value of money”. The standard rationale is, “all I have to do is let my money sit there and the banks will pay me for the privilege of lending out my funds”. And, at times, this conventional wisdom is 100% correct. Take the late 1970s and early 1980s – both consumer and business savings accounts paid rates in excess of 10%. As recently as the year 2000, some banks paid more than 5% for their savings accounts. Now, however, it is a different story altogether. Many banks are paying less than 1% interest on business savings accounts. And for consumers, the rates are even lower. BankRate.com reported the national average on traditional passbook savings accounts to be 0.04% on November 16th of last year. At that interest rate, it would take you 1750 years to double your money if you let the interest compound. But, believe it or not, there are other reasons why your business should have a savings account.
1. Saving Up for a Rainy Day
Regardless of whether the economy in general improves, worsens or stays the same – it’s hard to predict the challenges that your business will face in the next 12 to 18 months. You could lose your biggest customer. You could be hit by a major lawsuit. Several things could happen that could negatively impact your business. While there are always loans and lines of credit that can help you weather these storms, it may not be such a bad idea to stockpile a little cash – just in case.
2. Saving Up for Your Lucky Day
Just like you can’t predict when your business will face tough challenges, you never know when your business will be presented with unparalleled opportunities. A major supplier of yours could have a cash crunch and all of the sudden is willing to give you a 30% discount on a critical raw material if you order and pay immediately. You could get a call from a big box store wanting to immediately stock 100 of your best selling items in each of their 6000 stores, provided that you can ship the inventory within the next 60 days. What about this scenario – what would you do if you found out that your biggest competitor was teetering on the brink of bankruptcy and would be willing to sell you a critical component of their business at a fire-sale price? It’s true that it’s often easier to get a loan to take advantage of a good opportunity as opposed to saving your business from an impending disaster, but could you do it in a month or in a week, if need be, to take advantage of a once in a lifetime opportunity?
3. Savings Encourages the Right Behaviors
If you do decide that having a stockpile of ready cash is a good idea, how are you going to save up these dollars? One way is to scrutinize your expenses. Does your business really need to rent a cappuccino machine at $72 a month? Can you save a couple of thousand dollars a year by changing telecommunications providers? Another way is to systematically set aside a certain percentage of every sale for your rainy/lucky day fund. Regardless of which of these tactics (or others that haven’t been mentioned) that you choose, you are building core traits that will serve your business in the long run. Saving money by whatever means takes discipline and, coincidentally, discipline correlates with business owners that succeed over time. While you might not earn much interest on your savings account in 2012, who knows what 2013 or 2014 will bring? If you save for the valid reasons mentioned above and accumulate a tidy sum, you might just find yourself sitting on a pile of cash when savings account interest rates next peek above 5% or 10%.
Check out our savings calculator to crunch some numbers of your own.