Kavan Choksi – An Overview for Setting Up an Emergency Fund for Small Companies
A business emergency fund is a large sum of money that small companies keep aside to use in times of financial distress. The objective of corporate entrepreneurs in maintaining the capital reserve is to create a financial safety net for their businesses. They can then use the money from the reserve to meet unforeseen business costs resulting in situations beyond their control. These could include a sudden economic recession, stringent compliance regulations, changes in tax liabilities, or natural calamities. The capital reserve enables them to maintain a steady cash flow for their corporate enterprises to ensure the continuity of their business operations.
Kavan Choksi – Why do small companies need a business emergency fund?
Kavan Choksi is a businessman with an interest in photography, the latest cutting-edge technologies, and business finance. According to him, companies need to set aside a certain portion of their cash revenue to deposit in an emergency fund. The money from the reserve allows the corporations’ entrepreneurs to meet their business costs despite a considerable decline in sales revenue. They can still incur essential operating costs, settle their suppliers’ dues, pay employees, purchase inventory and clear their outstanding business debts. The emergency fund provides them with a lifeline to ensure the smooth running of their business operations. Otherwise, they will have no option but to file for bankruptcy.
What types of assets should companies keep in the emergency fund?
The business emergency fund that the small companies set up for their businesses should comprise both cash and liquid assets. These assets could include treasury bills maturing within a year, marketable securities, short-term bonds, tax refunds, certificates of deposit, and stocks. The corporations should even deposit the capital reserve’s proceeds in a commercial bank that grants them unrestricted cash withdrawn privileges. It enables the corporate enterprises to access funds available in the capital reserve in times of dire financial difficulties. Moreover, maintaining a business emergency fund enables the companies to minimize their dependence on high-interest debt alternatives likes lines of credit.
How to establish a business emergency fund?
Small companies should keep in mind the following steps when building up adequate business emergency funds for their organizations:
- Keep aside and deposit an amount equivalent to 30% of annual after-tax revenue to the fund,
- Select a suitable commercial bank to deposit fund that offers automatic cash withdrawal faculties,
- Anticipate probable slow business sales periods according to the previous financial and sales data,
- Deposit a small percentage of the annual revenue to the emergency fund on a regular basis,
- Review how much cash flow is necessary to maintain operations due to ever-changing scenarios,
- Re-evaluate monthly operating expenses and revenue necessary to meet them on a regular basis, and
- Forecast and plan for all worst-case scenarios that are likely to adversely affect the business.
According to Kavan Choksi, a business emergency fund enables small companies to run their business operations smoothly during severe financial difficulties. It prevents the corporation from having to file for bankruptcy due to a serious cash-flow shortage. However, corporate enterprises should only access the money in the emergency fund during natural calamities and dire business interruptions.