Research and reports
Whether you’re saving for a big purchase or making sure you’ve got the money to pay for unexpected costs, sinking funds are a useful tool to reduce financial anxiety and stress.
Read on to find out how sinking funds work, with some top tips from financial education expert Charlotte Jessop (@Lookingafteryourpennies).
A sinking fund is a pot of money that you top up regularly to cover big business costs such as tax bills or new software.
By saving a small amount of money each month, you can build up a large pot over time and pay off larger bills with less stress.
According to Charlotte Jessop, sinking funds provide built-in buffers for small business owners.
Speaking at the Simply Business How to manage your money in 2023 webinar, she said: “The point of this is that you’re ready for things you have coming up, but you can also have pots for things that are completely unexpected that you couldn’t possibly prepare for.”
She said this reduces the worry of where money is going to come from and stops business owners from thinking they’ll have to do extra work to cover a specific bill because the money is already there.
Sinking funds don’t need to be exclusive to business finances, they can also be used to save money for big annual personal expenses too, such as Christmas or car insurance.
Charlotte Jessop explained that sinking funds for small businesses can be used for three main purposes:
For example, you could have separate pots for annual costs such as:
Charlotte Jessop explained that you can use accounting software to tell you how much money you need for each bill and then move it into the relevant sinking fund when you get paid.
For annual costs such as website hosting, business owners can start a savings pot at the beginning of each year. If they take the full amount and divide it by 12, they can split the total bill into manageable monthly payments.
If your annual bill for website hosting is £360 and it’s due each May, you can start saving £30 a month from June. When it’s time to pay the next bill the following May, you’ll have the full amount in your sinking fund.
Even for businesses that get paid more sporadically (for example if you have a handful of big contracts each year), you can put a percentage of everything you get paid into sinking funds for your various costs.
Our research shows that money is the biggest concern for one in three small business owners in 2023, while 80 per cent said they’re worried about the cost of living crisis and the impact it could have on their finances.
Alongside tips on using sinking funds, Charlotte Jessop gave small businesses owners who attended our webinar some key messages to remember when managing their money:
Charlotte Jessop is the financial educator, coach, writer, vlogger, and podcaster behind the 'Looking After Your Pennies' platform.
Her expert tips have been featured across the national media, including the BBC, Sky News, ITV, the Telegraph, and the Financial Times.
Charlotte's advice ranges from free budgeting spreadsheets to five-day financial health checks.
Do you have any unanswered questions about setting up a sinking fund? Let us know in the comments below.
Conor Shilling is a Copywriter at Simply Business with over two years’ experience in the insurance industry. A trained journalist, Conor has worked as a professional writer for 10 years. His previous experience includes writing for several leading online property trade publications. Conor specialises in the buy-to-let market, landlords, and small business finance.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
6th Floor99 Gresham StreetLondonEC2V 7NG
Sol House29 St Katherine's StreetNorthamptonNN1 2QZ
© Copyright 2023 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.