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
This would definitely vary depending on the client and the industry. In general, I always recommend having a cash reserve (somewhere from 3-6 months of expenses) plus putting away the 10-20% of retained earnings. If you establish a reserve first for emergencies, then what gets put away on top of that can be used for growth and future planning. In general I'd use the 10-20%, but this will really vary based on each clients individual goals.
