Contingency Fund

No matter how much you plan your lifestyle or business the risk of uncertainty is always there. Anything can happen anytime and can catch one by surprise. So, it is important to plan ahead for such happenings financially as unforeseen events mean either sacrificing savings or falling into the trap of additional debt.

To avoid these possibilities, one must have a plan in place beforehand. The answer to this problem lies in creating a Contingency Fund that would come in handy in times of need.

The Contingency Fund is a fund designed to be utilized in case of any emergencies and could be in the form of either cash or liquid asset.

The main objective of the fund is to increase a business’s financial stability and protect its financial plan in emergency situations. It is also helpful in avoiding consideration of high-interest rates options such as credit cards.

Understanding Contingency Fund

The Contingency Fund is being used by businesses to meet expenditure that arises due to any emergency while being able to operate the normal course of business.

The Contingency Fund enables business owners to address emergency large funding needs without disrupting routine operations.

If a company goes around having no Contingency Funds it might become difficult for it to deal with uncertain events such as natural disasters, mechanical failures or medical issues which can drain most required resources while also hampering the company’s ability to conduct its normal course of business.

Businesses need to maintain a Contingency Fund by making more purchases on credit saving cash for unforeseen events. An alternate way is to keep a credit line open which can be used to pay bills while cash can be spent in case of emergency.

Paying large expenditures

Contingency Funds might not just be limited to emergencies it can also be used for major business expenditures. The nature of these expenditures can range from replacing old equipment, upgrading technology or acquiring other assets.

However, it is important to understand that Contingency Funds should always be used to upgrade the business rather than paying for routine expenses or extravagant items.

Protecting Credit

For businesses to avoid the practice of using credit to finance unexpected expenses it is important to have emergency capital available. Otherwise, it would find itself paying interest and paying back loans for years to come. High debt results in many disadvantages for the company such as the inability to acquire new assets or replace old ones.

Budgeting for a Contingency Fund

Companies must develop their own Contingency Funds according to the business’s needs. The fresh start-ups will need a higher percentage of budgets dedicated to Contingency Funds. For any start-up, it is important to have 10 to 20 per cent of the budget to be set aside as a Contingency Fund.

This can help to pay for any unforeseen expenses but also to increase cash flow in the early stage of business development. For small businesses, the percentage can be anything between 5 to 7 per cent of their budget.

Advantages of Contingency Fund

Having a Contingency Fund allows the business to run smoothly without facing any difficulty in case of emergencies. It enables the company to meet its financial requirements and to deal with the monetary crisis without affecting its daily operations.

Moreover, it also helps the business to remain firm-footed in case of severe crisis. It helps to attain financial stability in case of a sudden mishap.

Ways to set up Contingency Fund for the business

The following are the aspects to consider while setting up a Contingency Fund for the business:

Analyze your company needs

It is very important for the business to consider the company’s type and need on the amount required to run the operations. This is because it will be different for companies depending upon the industries, they operate in.

Maintain an emergency savings account

Creating a separate account with the sole purpose of savings will be very helpful in ensuring finances available for the rainy days.

Save in high-profit times

Apart from crisis management, this is also important for saving for new acquisitions and expansion plans which might require additional savings but due to inadequacy of Funds would face issues. However, this should be done when the growth rate is high and income is steady.

Reduce expenses

Reducing unnecessary expenses and making informed purchases can be really useful in maintaining the financial health of the company and also securing the company’s future. One strategy in this regard could be to negotiate rates with vendors and clients on regular basis.

Supplement your income

Investing wisely is a key to managing better contingent Funds for the company since it will create another source of income and also support the business in times of need.

Saving tax refunds

Savings is the fundamental aspect of managing funds for the business. So, in order to save the business needs to manage its savings which can be increased in times of higher profits.

Consider potential risks

It is also important for the business to be mindful of the potential risks it could face during the course of its business. Businesses can conduct a SWOT analysis to evaluate possible risks and mitigate them accordingly.

Regular monitoring

By regularly monitoring and assessing the financial needs of the business it will be easier to deal with the risks and challenges which arise at different times of business growth. Revisiting and updating according to market and industry needs will prove to be useful while dealing with uncertain situations.

Conclusion

While planning and maintaining Contingency Funds are important for the business to foster in the long run it is equally important to pay attention to Contingency planning as a whole. This is because the internal and external risks need to be managed carefully for the business to deal with unforeseen events. If the business manages its Contingency Funds the right way it will be ready to deal with any risk in the best possible manner.