Question
I have witnessed some small OR new business owners are facing various challenges with maintaining their "retained earnings" in order to handle emergencies, unexpected expenses, reinvesting in business or paying back debt. This results taking additional cash from else where and getting into additional debt for the business. Now, I definitely agree that we need to take calculated risks in order to have successful business. However, from a P&L point of view, what will be your percentage recommendations for retained earnings at the end of each month.
I always recommend 10 to 20 percent of retained earnings or a fix balance amount but I am curious to see experts recommendations on this subject.
*Retained earnings could be referred as emergency fund, internal monetary fund or many more.
Answer
Range depends upon the strategies you can apply. Every business has objectives that guide policy and in their most basic form include survival, profitability, and growth. So, while the primary financial responsibility from an ownership viewpoint may be to maximize value, the financial executive’s primary managerial responsibility is to preserve the continuity of the flow of funds so that no essential decision of top management is frustrated for lack of corporate purchasing power. Considered in these terms, the task of financial management involves anticipating the pattern of release of funds from, and commitment of funds to, various specialized uses, identifying points where a surplus or deficiency of liquid funds may be expected, and taking action to employ the surplus or cover the deficit. It is the need arising with little warning and great urgency that tests the financial officer’s mettle.
You can read more here: https://hbr.org/1969/11/strategy-for-financial-emergencies
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
