A financial cushion is a confidence and the ability to take risks in anticipation of higher returns. In the event of a crisis, this money will help to stay afloat until the situation changes or a way out is found.
Basic rules for the formation of reserves
The secret to success is regular deductions from net profit. In this case, they all independently determine the amount of money that is earned to save (usually it is around 10-15%).
If the company has passed due debts, the debts are paid off the “pillow” and then the accumulation process continues. The main thing is not to stop, otherwise, the airbag will remain an unfulfilled dream.
Experts generally recommend spreading savings across three funds:
- Emergency stock: Finances in case of serious problems. For example, a global economic recession or a pandemic.
- Legal costs: With this money, legal expenses are paid in case of unforeseen circumstances.
- Development: Money for the purchase of the real estate, equipment, replacement of working capital, etc.
The correct solution would be to establish a minimum balance for each fund. Anything that accumulates on top is a nice bonus that can be used if necessary.
Optimal airbag size
Looking at past crises, we can say that to stay afloat in difficult times, a company needs a margin equivalent to the amount of 6 to 12 monthly expenses. All expenses are taken into account: salaries and rents, taxes, loan payments, among others.
How to store money for a rainy day?
Economists are convinced that for the “pillow” to work once, the funds need to be set aside in cash or easily converted into monetary units. Therefore, it makes no sense to invest in illiquid assets: securities, precious metals. In the event of a recession, they will need to be sold below cost to urgently raise the required amount.
The optimal solution is selected individually: someone keeps it in a safe, someone with an indefinite deposit or a checking account. Some entrepreneurs prefer accounts in foreign currency and convert money into monetary units of 2 or 3 countries (this allows balancing the fluctuations of the exchange rate, preserving the purchasing power of the accumulated funds).
Where can I find the money for an airbag?
In difficult times, you must take every opportunity to replenish your financial reserves. They usually offer the following algorithm:
- Calculate all financial balances in the company’s checking accounts.
- Calculate the number of accounts receivable you may have soon (also be sure to write down those debts for which there is a risk of delay).
- Collect all debts most persistently and actively possible.
- Estimate the costs of the business in the next 3-6 months (assuming no improvements, as well as outside assistance).
- Highlight fixed and variable costs.
- Cut all the costs you can cut. If not, look for savings options.
- If possible, change the maturity of accounts payable (lease, rent payments, utility bills, bank loan payments, etc.).
- Find additional sources of income, from bank loans to borrowing money from friends or family.
- Analyze your assets. If not in use, sell it.
- As a leader, consider your own expenses. Perhaps they can be cut back and the funds released can be used for business needs.
- Review the payment system. It may be worth switching to a shorter workday, transferring employees to a remote work format. The crisis is the time to reconsider the importance of each person in your organization. If in doubt about the need for a staffing unit, downsize and optimize.
- Make a survival plan for the months to come. To do this, allocate funds to pay for mandatory expenses in the next 3-6 months. After that, transfer 10% of the remaining money to the reserve. The rest can be used to cover variable costs.
These measures will be useful for small and medium-sized companies, regardless of whether there are at least minimal financial reserves. An airbag in any shape is an opportunity to last longer without serious losses and get to your feet faster than the competition.