Emergency reserve for companies: how to set up a

As organized as management of a business, no one is free of financial unforeseen events. Either to pay extra expenses, supply weaker months of sales, or even to take advantage of some opportunity, have a Emergency reserve for companies It is very important for the financial health of the operation.

In addition, these resources can also protect the company from situations alien to the activity itself, as Philipe Pellegrino, Head of XP Empresa notes.

“Having an emergency reserve is fundamental in the face of tax, political and economic uncertainties that can directly impact liquidity due to market and credit risks,” warns the executive.

In this guide, the Infomoney He gathered the main aspects about the emergency reserve for companies – such as setting up one, what is the right size, and answers to frequent questions on the subject. To learn more, continue the following reading.

What is the emergency reserve for companies?

These are the resources that the company needs to have available to face financial emergency situations.

These situations can be caused by unforeseen events that require spending or to take advantage of opportunities that can bring benefits to the business. Some examples are:

• drop in sales (unexpected or the seasonality of the business);
• delay or default of customers;
• extra spending on raw materials, wages or other operational;
• Machinary repair or any urgent purchase;
• Increase stocks to take advantage of some supplier promotion.

Is emergency reserve the same as working capital?

Both concepts are fundamental to the financial health of a company, but have different meanings.

When we talk about working capital, we are referring to the sum of all the financial resources that the company needs to make its activity work. In this account, enter cash, bank balance and applications, values ​​receivable from customers, inventories, suppliers, loans and so on. That is, the working capital includes its own and third party resources that the company uses in its operation.

In turn, the emergency reserve corresponds to the portion of its own resources and immediate availability. In the Balance Sheet, these resources are in cash, in the current account balances and in the financial investments of immediate liquidity.

As a warning Pellegrino, the emergency fund should be kept separate and cannot be considered for the company’s routine expenses. This is because its function is precisely to protect the business against financial crises, default or other unforeseen events.

Is the emergency reserve for companies different from staff?

The purpose of the emergency reserve is to ensure more financial comfort through emergency – and this is for companies and individuals. However, it is always important to separate the resources from the partners from the activity itself.

The personal emergency reserve serves to cover particular emergency situations, such as medical expenses, car repair, house repairs, or even lack of income in periods of unemployment, for example. Already from the company, considers factors exclusively focused on the operation, such as those we saw earlier (fall in sales, default, extra expenses, among others).

Importance and advantages of emergency reserve for companies

For all we have seen so far, we can understand that the emergency reserve is directly associated with efficient financial management. Here’s how these features can be important and bring advantages to the company in practice.

Cash Flow Management

Whatever the business sector or business size (MEI, individual, medium or large organizations), it is very important that it do a good, keeping payment flows and receipts always in balance. And one way to achieve this is to be able to count on resources for when financial unforeseen events or good acquisition opportunities come up.

Capital Protection of Working

As we have seen, maintaining an emergency financial fund prevents the company from using its working capital for other purposes other than the day -to -day operation. When any urgent situation arises and there is no cash clearance, partners will have to sacrifice working capital or use more expensive financing sources, and the financial cost will bring negative reflexes to the result of the activity.

Protection against instability in the economy

Anyone who has a business knows how much the swings in the economy can bring headache in certain situations. In periods of high interest rates, for example, purchases and credit are more expensive, and this can drive customers away, reducing the operation of the operation.

At times like this, financial reserves give the company more tranquility to face market oscillations until the economic scenario resumes normality.

Take advantage of strategic opportunities

Those who have money in their pockets can take advantage of good opportunities as soon as they arise. With companies, this is no different.

Depending on the negotiation, a cash purchase can result in bonuses or a good discount, and leverage sales of the month. The same goes for those who want to expand business, invest in technologies or develop a new product quickly to overcome competition. All of this is much easier with the liquidity of an emergency reserve.

Market credibility

A capitalized company gives the image of seriousness in business management and solidity. Customers and suppliers begin to realize the negotiation power of an organization that has good cash management, and this also contributes to the strengthening of its brand.

How to set up an emergency reserve for companies?

The first action to take to constitute the emergency reserve is to organize cash flow, which helps control revenues and expenses. According to Pellegrino, this makes the entrepreneur be able to predict and avoid negative results.

“It is also important to evaluate the operational cash reserve (resources generated by the projected cash reserve, considering the seasonality of the sector. The entrepreneur must have in perspective everything that impacts the financial margin of the business. Finally, it is necessary to maintain a routine of the company’s financial management, to make strategic decisions based on data based,” says Head of XP Enterprises.

How to define the value of the emergency reserve for the company?

There are different variables to consider to define the value of this reserve.

The first step is to understand the profile of the business and know your peculiarities well. For example, if there is seasonality in the sector (tourism, retail and others) or dependence on components subject to oscillations (imported raw material or commodities), what are the payment and receipt deadlines, and other risks inherent to the operation.

According to Pellegrino, a good parameter for the company is to separate the value of three to six months of fixed costs as a minimum emergency reserve.

“According to risk management practices and business cycle analysis, this would be an average time for recovery at seasonal times of crisis, price adjustments and to resort to new credit lines or promote strategic changes,” he concludes.