Why do you need a financial buffer?

You do not always know how much money your business will earn in a month. If you have a buffer, you will not immediately run into financial problems if things go wrong, and you will be able to pay unexpected expenses. Wim van den Berg of Stichting Ondernemersklankbord (Entrepreneurs Soundboard) regularly speaks to entrepreneurs with money problems. He used to have his own accountancy firm and helped entrepreneurs with their administration and money matters. “The problem for many entrepreneurs is that they think: ‘It will be fine.’ Often they don't ask for help until it's way too late.”

1. Why do I need a buffer?

It may take some time before you make money with your business. Before you start your business, make sure you have already saved some money or arranged financing. Then you can still pay your rent, taxes, and groceries.

Van den Berg regularly sees this go wrong: “Entrepreneurs then try to pay their rent or mortgage for as long as possible. But other bills remain outstanding and if that takes too long, you must deal with debt collectors.” Having a buffer means you can avoid this financial stress.

Even after the start-up phase of your business, it is useful to have savings, because something unexpected can always happen. Say you have a carpentry business, and your electric saw burns out. Then you need to buy a new one right away, because you cannot do your job without it. Also, you might fall ill or have no customers for a while.

2. How much buffer do I need?

How much you need to save for your buffer depends on your situation. So work out how much buffer you need. Not only for your business, but also for your private use. List the costs you incur for your business and private life. Think about what you could save on if you had to. Nibud, the National Institute for Family Finance Information, has developed a ZZP money plan (in Dutch) to help you with this.

“A liquidity budget is essential for every entrepreneur,” says Ven den Berg. “With such a budget, you keep track of your company's money. Do you find it difficult to draw up a budget? Then you can ask for help from a bookkeeper or accountant. It's nice if you can talk to someone about money matters.”

When determining the amount of your buffer, think about these questions:

• How many clients do you have? If you have several clients, it is less of a problem if you lose one. You will still receive money from other clients.
• Can you easily save on fixed expenses? If you have few fixed expenses, it is easier to save. If you have an office or staff, you are usually tied to contracts. So then you need a higher buffer. It can be smart to employ staff on flexible contracts when you are just starting your business. Then you can easily cancel them if necessary.
• Can you easily find a job in an emergency? If there are many jobs available in your field, chances are you will find employment quickly. And you will need a lower buffer.
• Do you have disability insurance? Then you do not need to save as much or any money to cover the risk of getting sick. The same goes for legal expenses insurance for companies. This insures you against high costs of a lawyer or lawsuit. If you have a job alongside your business, your buffer does not need to be as high as if you were a full-time entrepreneur.
• Do you have a partner with a good income? Then you also need less savings.

3. How do I build up a buffer?

Saving is difficult for many people. But every little bit helps. If you get into the habit of saving money every month, it becomes a regular expense that is just part of your business. Not everyone realises how much money they spend each month, Van den Berg notes. “One entrepreneur told me he was spending about €3,500 euros privately every month. When I looked at his accounts, I saw that it was much more, almost €8,000 a month. He didn't know where all that money was going. That's why it is important to know how you spend your money.”

Here are ways you can build up a buffer:

• Set aside a fixed portion of your profits. In the beginning, this does not have to be a lot of money. The most  important thing is to start. As your business grows, you can start saving more.
• Save a fixed amount per month. Even if you save this way, you can start with a small amount. Increase the amount as you start earning more.
• Save the money you have left over at the end of the month. Many people choose to save this way, but the danger is that by the end of the month, your money is already gone. And there is nothing left to save.

Do not make spending money too easy. Put your buffer in a separate savings account, for example. That way, when you open your banking app, you will not see that amount straight away. There are also online savings accounts where it takes a day or longer for the money to appear in your current account. That makes it harder to spend your money. Just make sure you always have some savings that you can withdraw immediately. Also check Nibud’s savings tips (in Dutch).

4. Interest on savings is low, should I invest my savings instead?

Your buffer is an emergency savings pot to prevent money problems. You do not want to run any risks with this money. Investing (in Dutch) always has risks. Also, with an investment account, it is often not possible to withdraw money immediately. While that may be necessary in an emergency. Even if you get little interest on your savings account, it is still smarter to always have immediate access to your buffer.

When you invest for a long time, it usually yields more money than when you save. But the value of investments rises and falls. Therefore, it is wise to invest only with money that you can miss for a long time. If the value of your investments has fallen a lot by the time you need your buffer, you will have a problem.