I see saving up for a rainy day, or establishing a Reserve Fund, kind of like how my kids see their vegetables. We both know what needs to be done and we both know why it should be done…
“But if broccoli smells this bad, won’t it taste even worse?” - My Kid
The idea of putting additional money (we can’t spare) aside for some unknown thing that may or may not happen just smells bad. Then after that first month where you reduced your owner draw by 20% to start the Reserve Fund, the originally smelly idea ends up tasting just as bad as it smelt. Or is it smelled?
I am here to tell you that I am now a believer who LOVES broccoli.
Termites? Not so much… Pesky little termites gave us our first opportunity to dip into our Reserve Fund, which we reluctantly and nearly did not set up a year ago as we started renting the third house.
I never thought paying thousands of dollars to eradicate tiny little house-biting bugs could feel so good.
The first time a band of termites set out to eat one of our houses it caught us completely by surprise and $3,600 later we were left thoroughly bummed out. We had the money in our account but we were headed into our off-peak season when cash is tighter, and it made for an uncomfortably long winter and some dismal owners draws.
Here’s How The Rainy Day Fund Works (adjust according to your house’s specific circumstances.)
*I’ll assume that you are in some way tracking your revenue and expenses. If you are not, yet, then be sure to read the next blog.
Step 1: Determine a target amount to have in reserve (as cash, and accessible). Let’s say $10,000.
Step 2: Figure out how much you can pull from your monthly owner draw, enough that you will feel it but it won’t disrupt your ability to cover monthly expenses. Let’s say 20% of monthly net income.
Step 3: Set this money aside and use your first month’s reserve to open a new savings account. *Not a must-do, but we’ve found it to be convenient for book keeping.
Step 4: Don’t cheat the fund. You’ve got to be consistent and build your monthly P&L to account for this money being set aside. Now watch it grow!
Here’s Why I Wanted to Tell All of You About It
Consistent Cash Flow is the first reason our reserve fund worked great. We took a $3,000 expense hit in stride and still received 100% of the owner draw that month. We had enough money in the reserve account to cover the extraordinary and unforeseen expense.
Consistent Level of Service is perhaps a more valuable reason to establish a Reserve Fund. We did not have to scramble for the money, wait for more bookings or put it on the dreaded profit-munching credit card in order to take care of the problem. The repairs were completed over our first three day opening because we had the cash on-hand to do so. We did not have to inconvenience guests with our problem, and even if we had to put them in other accommodations we had the money on-hand to do so without worrying.
Peace of Mind is what the first two benefits above add up to. But there’s more. Our Reserve Fund is more than 60% to our goal even after the termites, Lord willing it will hit the goal in 2013. Once that happens we can look forward to a 20% Increase In Owner Draw, a welcome pay raise.
The Bottom Line: Saving up for a rainy day is a good idea that is worth the short-term pain to get there. Having a Reserve Fund will stabilize your monthly cash flow and provide a nice sustainable boost in owner draw once your fund is met. The peace of mind in knowing you have that cushion will pay dividends every day, and the immediate access to cash in the event that something major happens will help you make the repair sooner, accommodate the inconvenienced guests and ultimately provide that WOW moment in the face a potentially bad situation. Those are the moments that create a customer for life, and we could all use more of those.
Here’s to the month after our Rainy Day Funds spill over.