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03 Aug
  • Editorial Team
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Sometimes destiny smiles on us and sometimes, it frowns. That's why all businesses - big or small, old or new - must make the most of the opportunities but also prepare for damage control. There are many reasons that can cause the profits to plummet and we can't control many of them. However, what we can do is to have a counter measure mechanism in place to deal with financial crisis.

A 'Contingency Fund’ act as a back-up plan. It means you save a little from time to time, which can help you wade through the troubled times. Just like an umbrella which provides shelter during rain and storm, a contingency fund is a cash reserve that acts as an extra security blanket. It comes in handy to run the business when the usual income proves to be insufficient.

Advantages of having a contingency fund

  1. Liquidity in case of emergency: It's biggest benefit is its liquidity factor. The money is always available to you in case of an emergency. It is as simple as going to your bank and withdrawing the money without getting into the process of applications and approvals. 

  2. Reduction in financial stress: It reduces the stress as you don't have to press the panic button. You can take the time to think it out and take the correct decisions. For example, in case of sudden loss in business, you don’t have to take up the first available offer. Thanks to contingency fund, you can assess which job to take and bargain for better package without losing your sleep over how you will pay the monthly bills. 

  3. Developing a saving habit: It develops a habit of saving money- whenever, wherever, whatever you can save. It makes you financially disciplined. Also, it helps you earn extra income in form of interest you get from the bank and thus adds to your savings. 

  4. Minimize debt: In cases of financial problems or unforeseen situations like loss in business, share market crash, a fatal accident, natural calamity, contingency funds save you from going into debt. You don’t have to use your credit cards, or ask for loans from the banks, your friends and relatives. You also don’t have to constantly worry about repaying someone. 

Ways to create a contingency fund for your business

 

Businesses go through ups and downs throughout the year and it is imperative for them to have a rainy day fund. Maintaining it is much easier than people usually think, even when your budget is small. It might be a long haul but it keeps businesses afloat. Here are a few steps to get it started.  

  1. Analyse your company needs

At first, analyse your company's type and needs and decide on the amount that you require to keep running the operations. It differs from one type of company to another. A company that works with heavy machines in a factory may need more funds than compared to the one where employees work on laptops sitting in a co-sharing space. Consider all the risky situations that can send you in financial trouble from lawsuits to inclement weather to change in government policies. Once decided, try and reach that figure. Experts suggest that at least six months of operating expenses should be saved in the emergency fund.

  1. Maintain an Emergency savings account

Create a separate account and start diverting your savings in the account. You can also link two accounts and make sure a certain amount is deposited in this emergency/contingency fund. Don’t use this fund until you are in a position where only a loan can save you. In that situation, treat this fund as a loan but without any interest rate.

  1. Save in High- Profit times 

It's important to note that this is meant not only for crisis management but also for new acquisitions and expansion plans for which need may arise but the budget is low. However, the savings should be done when the growth rate is high and income is steady and this should act as cover up for the months when little profit was generated or the number of orders/sales was low. 

  1. Reduce expenses

Reducing your day-to-day expenses even before the arrival of a crisis can save you from undue mental stress and financial difficulties. The obvious strategy for this would be to negotiate on daily basis with your vendors, clients etc. Avoid unnecessary expenditure and extravagant cash outlays. The minimal money spent strategy is going to secure your company’s future. Also, be stringent towards the monthly budget. 

  1. Supplement your income

Investing all funds in one business can lead to massive losses if the business flops. Refrain from putting all your money in one sector. Also, having an ancillary business, which can back your main venture or outsourcing certain responsibilities to a company which can perform the desired tasks at a cheaper rate is a great move.

  1. Saving Tax Refunds

Savings is the most elementary thing at the time of any financial crises. Direct savings in terms of cash, fixed deposits, and mutual funds, gold would be beneficial in the stressful days. Increase your savings when you make higher profits. If your business is entitled for any tax refund, then make the best use of this refund by directing the returns to your savings.

Life is uncertain and so are our businesses. We must hope for the best and prepare for the worst. Having a contingency fund is of paramount importance for keeping the dark clouds away. 

Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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