Women-owned businesses are now becoming a new norm as more and more women now have the opportunity to become entrepreneurs. One of the essential skills needed to build and run a business is financial literacy as it empowers women to make informed decisions about their money. Being able to do investing, budgeting and debt management can significantly impact anyone’s ability to achieve financial growth and security. However, even today, many women lack the necessary financial knowledge, and it has far-reaching consequences for them. It makes them dependent on male members for their financial decisions. Thus, starting a business of their own and managing it without external intervention can seem impossible to them.
According to a report by the Organisation for Economic Co-operation and Development (OECD), women are generally less confident about their financial skills compared to men. This can lead to feelings of hesitation while making critical financial decisions which has a negative impact on women’s financial well-being. Therefore, it is needed that financial literacy is built among women, especially women who aspire to run their own businesses so that they can take control of their financial future.
The Importance of Emergency Funds in Everyday Life
Imagine you have an emergency situation at home like an unexpected medical situation or a sudden job loss. What will you do in this case if you do not have a certain amount of money saved as an emergency fund? You might have to borrow money from friends or relatives. Or, you might have to take a loan at high interest rates. Life is unpredictable and at any moment it can bring us face-to-face with a situation where having a corpus of emergency fund can act like a life saver. It also provides you with the necessary peace of mind as you know that you will never end up in a situation where you don’t have the money for at least a few months’ worth of expenses.
Financial experts recommend saving three to six months’ worth of living expenses in an emergency fund. The COVID-19 pandemic underscored the importance of having an emergency fund. It was during the lockdown that many people faced situations like reduced incomes, high medical bills and even job losses. Those who had an emergency saving were able to weather the storm while the others ended up in deep financial stress.
How Women Entrepreneurs Need Emergency Savings to Sustain Their Businesses
Similar sudden and unexpected situations can also arise when you are running a business. A market downturn may hit your profitability, or a natural calamity may cause infrastructural damage. What will you do if a client goes bankrupt and fails to make a payment that you were relying on for smooth functioning of operations? Not all these situations can be insured. Therefore, having an emergency fund is critical for any entrepreneur.
Running a business involves various risks, including fluctuating income, unexpected expenses and economic downturns. Without an emergency fund, women entrepreneurs may struggle to keep their businesses afloat during tough times. It is also more likely that women entrepreneurs face unique challenges which have a negative impact on their ability to save an emergency fund. This is because many women entrepreneurs run businesses that operate in the informal sectors or are small-scale businesses.
They also face a societal and cultural bias in forms of beliefs that women cannot manage their money properly. This can impact their confidence levels and their decision-making may also be impacted because of these added pressures. According to a report by MicroSave Consulting (MSC), over 40% of women-owned micro-businesses lack emergency savings, putting them at a higher risk of financial instability. This lack of savings can lead to business closures, increased debt and reduced economic opportunities for women.
Risks Associated with Not Having Emergency Savings
So, what can happen if women entrepreneurs do not have a sufficient emergency fund? Without a cushion, they may be forced to take loans at high interest rates – which can be even higher than usual market rate because of the gender bias – or they may even have to shut their business. It can further impact their personal well-being and financial situation. In addition, women are more likely to face challenges in balancing their business aspirations and their domestic life, often expected to give priority to personal emergencies.
Research by the Global Entrepreneurship Monitor (GEM) indicates that businesses owned by women are more likely to close during economic crises compared to those owned by men. It can be because of the lack of financial resources available to women and the poor support system. The closure of a woman-owned business can have a negative impact which is even bigger because most of these businesses are likely to employ more women, giving them the opportunity to build financial independence.
Therefore, it becomes even more important for women-owned businesses to maintain an emergency fund because their closure can kill the dreams of many women who find comfort and safety in working with such a business.
Ways Women-Owned Businesses Can Maintain Emergency Savings
To build and maintain an emergency fund, women-owned businesses can adopt several strategies:
- Create a Budget: The first step to creating an emergency fund is to have an overall budget in place. All the expenses, current and expected, should be noted down and it should be ascertained how much money the business will need to sustain operations for six to nine months in case of an emergency. The next step is to start saving some money to create a corpus which is equal to the value of this calculated amount.
- Prioritise Debt Repayment: However, if a business has debt for which it has to pay high-interest rates, its priority should be to repay that debt. This is because in case of an emergency, the business cannot stop paying its debt instalments, which can further exacerbate its worries. A debt-free business can figure out ways to survive during a downturn as it still has all the assets in place.
- Diversify Income Streams: One of the biggest roadblocks in growing a small business is to become dependent on a single source of income at the beginning. It may take years for a business to become sustainable. Until one reaches that stage, they should try to create diverse income streams so that they can fund the business expenses during downturns.
- Build a Financial Cushion: As mentioned above, women entrepreneurs can face unique challenges in terms of personal obligations too. Therefore, apart from an emergency fund for the business, they should also create a financial cushion for themselves so that they can weather any storm.
- Seek Financial Advice: Lastly, it should be noted that financial literacy is a tough concept to grasp. It is even more difficult when you are running a business, and you might want to focus your attention on growing the business rather than managing finances. Therefore, if you can afford to, then take support of a financial adviser.
Support Initiatives for Women Business Owners
There are many initiatives and programmes available to support women entrepreneurs in building their emergency savings and achieving financial stability. Here are some of the examples:
- Grameen Foundation: The Grameen Foundation works to empower women entrepreneurs through microfinance, financial literacy training and business development services. Their programmes aim to improve financial inclusion and support women in building sustainable businesses.
- Goldman Sachs 10,000 Women: This initiative provides women entrepreneurs with business education, networking opportunities and access to capital. The programme aims to support women in building successful businesses and achieving long-term financial stability.
- Smile Foundation’s Swabhiman Initiative: This initiative focuses on empowering women, particularly from marginalised communities, by promoting education, vocational training and financial literacy for them to become micro-entrepreneurs pooling in shared resources to make the programme sustainable. Swabhiman equips women with the skills and confidence needed to achieve financial independence and build sustainable livelihoods.
- Digital Financial Services: Financial technology (fintech) companies are developing innovative solutions to improve financial inclusion for women entrepreneurs. Digital financial services, such as mobile banking and digital wallets, provide women with convenient and secure ways to save, invest and use their financial resources properly.
- Government Initiatives: The Indian government also has various initiatives that support entrepreneurs, especially women entrepreneurs, to access loans at low-interest rates, and other kinds of support.
Women entrepreneurs need financial literacy and emergency savings to play the long game. To achieve this, they should access every opportunity that is available to them. Women make up half of the population of India and if their potential is used to its optimal level, it can help in overall growth of the country. Financial management of their business initiatives is one step in that direction.