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.
One of the considerations to answering this question is the business type, I mention this only because of the tax treatment of earnings. With an LLC or S Corp the owner pays taxes on the earnings of the business regardless of whether they are distributed or not whereas a C Corp pays its own taxes on earnings.
Having said that I think the best way to approach this is to set a goal of a fixed amount (and review that annually), in order to build that fixed amount up it usually a good idea to set aside a solid number like 10% or 20% of monthly earnings. I think it's also important to set this amount and be disciplined in funding it, rather than take the approach that you will just put whatever is left over at the end of the month, taking that approach often leads to nothing happening because people often find other things to spend the money on.
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.
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