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What is a company reserve fund?
A reserve fund is a pot of savings into which a company sets aside part of its profit. You can save for a specific goal, such as expanding the company or holding a staff event, or regularly put aside a small share of profit for a rainy day.
A reserve fund, or several funds, supports a company’s development. Without savings, it is harder to expand, pay salaries during a crisis and cover expenses when there is no profit.
You can view reserve funds as an investment in the company’s future well-being. During a crisis, they can provide a safety cushion that helps the business survive.
The purpose of a reserve fund
A company reserve fund has one main purpose: to provide a plan B for a crisis, a negative account balance or other business problems. These funds matter because they are there, and their very existence reassures the owner. A company may also have separate funds for different goals.
A company can keep separate savings for several purposes:
1. Expanding the company
Opening a new branch, buying equipment or taking on many more projects requires money to establish processes, hire employees and operate at break-even or even at a loss for a time.
2. Improving internal processes
Start saving for training, introducing new services into the company’s work or attending conferences. It matters that the team sees opportunities to develop as well as earning money today.
3. Paying employees’ salaries
You can pay salaries from a separate fund. This is useful for employees on fixed salaries whose pay does not depend on the company’s turnover.
4. Paying taxes
Savings for taxes help you prepare for large tax payments in advance. In the Russian context of the source article, these include payments to the Federal Tax Service (FNS). Other countries have their own rules and tax authorities.
How much should you set aside in a reserve fund?
For planning, you can use the company’s expenses for six months without additional cash inflows as a benchmark. This is an example of a reserve target rather than a mandatory amount for every business: consider your fixed payments, seasonality and risks.
For example, if your company needs 700,000 rubles per month to operate, including salaries, rent, services and taxes, a six-month target means gradually building a reserve of 4,200,000 rubles: 700,000 × 6. This is a ruble example from the Russian source, with no conversion into another currency.
Of course, not every company can afford to keep an amount equal to six months of expenses sitting in an account. Many owners decide that the money would be put to better use in the business:
- for expansion;
- for new equipment;
- for training and courses;
- for a new office;
- for specialist services, such as lawyers, business consultants and construction supervision.
That decision can often make sense. However, abandoning savings for difficult times altogether is risky. The COVID-19 pandemic and the economic upheaval of 2022 showed how quickly working conditions can change. A business needs to be prepared for tough times, even when everything seems under control and problems appear unlikely.
What can you spend a reserve fund on?
Given its main purpose, you should avoid spending money from this fund unless there is a pressing need. Each business owner decides what that means for their company. Examples include losing a court case against a customer, incurring a substantial deficit or facing a crisis.
How do you create a reserve fund?
Here is a process for creating a company reserve fund if you are just starting in business or want to put your finances in order:
1. Decide on the amount you need
Having enough money in an account to cover six months of expenses would certainly be useful for any business. However, you may want to break this large goal into smaller steps, such as first saving enough for a couple of months of uninterrupted operations.
2. Decide how much to save each month to reach your goal
We recommend choosing a manageable percentage so that you do not have to dip into savings because you have run short of money for salaries. The 101 app includes income and expense tracking and a Company Fund. This helps you see cash movements; decide separately how to replenish the reserve and involve your management team.
Download the app using this link and check the current features on the pricing page. Choose the terms that match your company’s needs.
3. Make contributions to the fund
Replenish the fund regularly according to your chosen rule when cash flow allows you to do so without compromising essential payments. If you face a cash shortfall, reconsider the amount and the saving period.
4. Decide where to keep the money
Choose a way to keep the money that takes both safety and access into account. For example, before placing funds in a deposit account, check withdrawal terms, possible restrictions and risks: the reserve must remain available when you need it.
The key is to begin. Take the first step towards putting your company’s finances in order. Download the 101 app to help simplify management and financial accounting.
