Business in the modern world is a constant movement in the conditions of competition, market changes, and the unpredictability of external factors.
From economic crises to force majeure circumstances such as pandemics or sanctions, companies face risks that can threaten their stability.
A financial safety cushion is a tool that can not only protect a business from such shocks but also become the basis for its growth and adaptation.
In this article, we propose to consider the features of forming a financial cushion for a business.
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Tips for creating a financial cushion for business
Savings for a rainy day help businesses survive difficult times. We recommend evaluating the following tips for creating a financial cushion for business.
Calculating the reserve amount
Before creating a reserve, evaluate the business's performance in previous years.
Consider the following factors:
- Is the business seasonal?
- What was the minimum revenue for the entire period of the business's existence and how long did it last? There is no need to take into account data for the first period after the company's creation until it reaches payback;
The minimum amount of monthly expenses required to maintain the business.
Then multiply the amount the business needs per month by the number of months in which revenue was minimal.
Making a list of potential investors
A safety cushion is not always the presence of real money.
Sometimes it is enough to understand where you will get it in a negative development of events.
It is advisable to think through a list of such people or organizations in advance.
The most common list of people who will support the business and lend money if something happens is called FFF: founders, family, friends - the founders of the company, family, and friends.
As a joke, the founders of the company in this list are replaced by "fools" - that is, external investors.
All sources of financing can be found, you just need to think and negotiate with people in advance.
Don't risk your personal property
Business is a risky business, but it is important to know what exactly you are risking and make decisions based on this.
If an entrepreneur loses his business in a bad scenario but keeps his personal assets, this is an acceptable risk.
But it is not worth risking all of your property, especially for a beginning businessman.
Prudent use of credit funds
A loan is a great source of financing, provided that you understand how you will pay back the money. It is even better to have several options.
Taking a loan based on the calculation “Okay, we’ll figure it out later” is the most common and dangerous mistake.
A place where you definitely should not take a loan is from microfinance organizations. This is a lender of last resort or rather hopelessness.
If you are thinking about taking money at 100-200-300%, then your business has a problem not with resources, but with the system.
Taking a loan for an uncertain difficult situation is also risky - it is better to take a loan for a specific purpose, for example, to cover a cash gap or scale a business.
In addition, you need to rely on a loan as a source of financing in advance, the analyst advises.
The ideal option is to have a confirmed credit line that can be quickly opened if necessary.
Diversification of income sources
The main financial cushion is understanding what to do in any difficult situation.
Provide for surprises as much as possible and diversify sources of financing: an approved loan, buyers who can give an advance, suppliers who provide a deferment, etc.
Where and how to keep a financial cushion?
Choose the most reliable and conservative instruments — accounts and deposits.
They offer confidence and protection of your funds thanks to deposit insurance and the reputation of banks.
For example, these can be JPMorgan Chase or Bank of America. If you choose savings accounts with interest, you can earn extra money.
Of course, the interest will not be as high, as when investing in stocks or other risky instruments. But in this case, the priority is security and availability, not profit.
You should not keep a financial cushion in risky assets, such as Bitcoin or Ethereum cryptocurrency (not dollars or euros).
Or, for example, stock quotes change every day — you can simply lose part of your savings at any time.
Most often, the value of such assets falls precisely during crises, when a business needs money.
There is always a risk that money may be needed “here and now”.
Therefore, when choosing where to keep your savings, think about how quickly you can access your funds.
For this reason, instruments such as stocks or cryptocurrency are not suitable for a financial cushion.
At critical moments, exchanges may be closed and access to funds will be blocked.
So, assets in which the financial cushion can be invested must meet three important criteria:
- Maximum reliability (investing the reserve fund in risky assets is unacceptable - this is not an investment).
- Protection from inflation (at least a small return, at the level of inflation).
- Instant liquidity (the financial cushion must be able to be partially or fully withdrawn for use at any time).
Final thoughts
A financial safety cushion is not just a reserve fund, but a strategic resource that provides businesses with stability, flexibility, and competitive advantage.
It allows businesses not only to overcome crises but also to use them as opportunities for development.
In a dynamic economy, the ability to plan and create a financial reserve is becoming one of the key factors for survival and prosperity.
If you want to learn more about financial management and the best payment methods, we recommend the Rates.fm service, available to users from different parts of the world - from Los Angeles to Paris.