What is a War Chest and Why Should you have one as an Entrepreneur or Small Business?
- May 26, 2021
- 4 min read
Written by: Stephanie Cunningham, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Many small business owners and entrepreneurs are bootstrapping and funding their businesses with their own personal funds. Once things get going, they can generally breathe a little better, and the business becomes somewhat sustainable. This is when many folks become comfortable or even complacent. However, this is when it becomes critical to have a “war chest.” What is a war chest? This is the reserve of funds for things that may come up either with unexpected events or situations out of your control. This may seem absolutely insane but stick with me on this.
As a business owner, if you bring in $1,000 worth of sales every day, is it unreasonable to put aside $50 a day? That then equates to $250 a week (with a five-day week) and $1,000 a month on average put aside. This does not seem like much, but as your sales increase, you continue to put away the 5% into an account that you do not touch. When your busy season is in full swing, say a construction company during good weather, you are saving 5% of your sales and likely not feeling the sting of trying to put money back. Then when you are in the slow season, and maybe you go down to $100 a day, you are still putting away that $5. This is not a payroll reserve account or a cushion in the event it is a slow month. This is your war chest.
The war chest monies are set aside for that big client that you recently parted ways with. In their frustration, they dispute the $5,000 payment made by credit card for their contract. Did you know that credit card companies allow up to one year for a dispute and will take those funds back without warning while you are left to provide documentation and support that you provided the necessary services? This happens quite often, and it can and does destroy small businesses. That $5,000 could be their payroll, mortgage on the building, or merchandise to sell to generate revenue. As they are called, these chargebacks can take upwards of 90 days to resolve, leaving you as the business owner to either figure it out or suffer. Additional fees are generally incurred from the credit card processor as well, making that $5,000 grow substantially.
The war chest is for the customer that falls in the entryway of your building and gets hurt, who later ends up suing you and your insurance carrier, or the client who suddenly dislikes the remodel you finished a month ago. Legal fees add up quickly. What about the client you work with that ended up with a hacked bank account, and suddenly their $10,000 invoice that was paid by ACH now gets returned? These events happen every day and can take up to ten days to resolve. How many small businesses could handle that? What if all these events happened in the same month? Without a war chest, they may not survive.
These scenarios are ones I can speak to personally and why I advise every client that I serve to have these monies set aside. In three days, more than $20,000 was disputed or returned by the client’s banks. I did not flinch. I was able to manage just fine but had I not had my war chest. I would have gone out of business. If this had happened in my early stages of business, I would have certainly not recovered.
The theory behind the war chest is the more successful your business becomes, the increased exposure you face. By putting that money aside in the event, you need an attorney, need to dispute a customer contract, or whatever the case, maybe you can adjust but still maintain the flow of business. It seems simple enough, but most small businesses are not prepared to face what could happen. This does not make them less of a business or less successful. It just means they have room for planning and preparation. The need for preparation is more important today than ever if you have employees or coming off the pandemic.
Prepare for the worst but hope for the best. Build your war chest.
Stephanie Cunningham, Executive Contributor Brainz Magazine
Stephanie Cunningham has a Masters’ Degree, in Accounting and Financial Management. She writes about accounting and business for today’s world. She has extensive knowledge of the non-profit, construction, real estate and service industries which she serves. Stephanie has become a leading expert in QuickBooks as well as outsourced accounting services. Stephanie lives in Missouri and volunteers and cooks for her local rescue mission, serves with Made to Serve as well as Race for Rett, mentors local female high school students, has a passion for wine and cooking, and loves spending time with her family and close friends.
