Companies of all sizes share one thing in common: the importance of maintaining their financial health. In this context, capital reserves emerge as a fundamental tool for operations in any industry.

Having a capital reserve means creating a safety net to deal with unforeseen events and ensure the operational stability of the business. Without it, the company is likely to be unable to handle crises and unexpected events.

Curious to learn more about the importance of capital reserves? Then just keep reading this article!

What is capital reserve?

The capital reserve is a portion of a company’s equity. It consists of financial resources that do not come from operating revenue, but rather from other sources—for example, third-party investments, share premiums, partner contributions, and more.

This fund is important because it has several uses. Generally, it’s intended to finance investments, cover potential losses, and ensure the business’s financial stability. Finally, the capital reserve can also be used to distribute dividends to shareholders.

Therefore, creating and maintaining a capital reserve is crucial to the company’s financial health . After all, this fund can act as a safety net in times of economic uncertainty, as seen above.

To determine the ideal capital reserve for a company, it’s necessary to analyze factors such as its segment, structure, risks, and goals. Therefore, there’s no single formula for this calculation, requiring a personalized approach.

Other types of reservations

In addition to capital reserves, there are other types of reserves a company can have in its finances. Since each has a different purpose, it’s worth distinguishing them:

• profit reserve : it comes from profits retained by the company, not distributed to partners or shareholders;
• financial reserve : allows you to cover uncertain or possible future expenses , such as legal proceedings, fines, product or service guarantees;
• cash or working capital : amount available for short-term expenses.

What are the benefits of maintaining a capital reserve?

Capital reserves are an essential tool for any business’s operations thanks to the advantages they bring. Below, you’ll see the biggest benefits of creating and maintaining this resource in your company!

Guarantee of financial health

Having a capital reserve serves as an indicator of a company’s good financial health . Whether short- or long-term, a robust reserve demonstrates that the business is prepared to face challenges of various kinds.

Operational flexibility

The capital reserve also allows the company to take advantage of investment opportunities and deal with unexpected expenses. This flexibility is also valuable for dealing with periods of reduced cash flow, whether seasonal or unprecedented.

Greater stakeholder confidence

Having a capital reserve tends to increase the confidence of your company’s stakeholders, such as investors, employees, and even your own customers. This can increase employee retention and customer loyalty.

Reduction of dependencies

A company without a capital reserve is always subject to external financing conditions, such as loans. With this resource, the business has greater control over its operations and avoids taking on unnecessary debt to finance its operations .

Better loan conditions

On the other hand, if your company really needs to take out a loan, maintaining a capital reserve will also help. After all, financial stability is essential to securing better terms and more favorable interest rates in this context.

What about the risks of not having an adequate capital reserve?

In addition to understanding the benefits of a capital reserve, as you’ve seen, it ‘s also worth considering the other side: understanding the risks your company faces by not valuing this aspect of its finances .

An organization that makes the mistake of not having a capital reserve is vulnerable to all sorts of unforeseen events, ranging from a widespread market crisis to the loss of a major client.

Furthermore, the company begins to miss out on growth opportunities. After all, growth requires investment. If there’s a lack of capital for this purpose, your business’s development is limited.

It’s also worth remembering that a company’s financial health is crucial to its reputation. Keep in mind that if a company struggles to honor its financial commitments and remain stable, its credibility suffers.

How to build a capital reserve in the company?

Now that you understand the importance of having a capital reserve in your company, it remains to see how to gather the resources appropriately.

One of the key points is to set clear goals for building your capital reserve. This can correspond to a percentage of your annual net profit or an absolute amount to be achieved within a given period.

Another point is that this objective should serve as motivation to acquire the necessary resources. For example, if the idea is for partners to invest in the company, it may be relevant to reduce unnecessary expenses to increase the resources available for investment.

This process also serves as an opportunity to rethink your business strategy in order to enable third-party collaboration to form the reserve.

Regardless of the approach you choose, it’s always important to maintain discipline and use the fund only for its intended purpose. Only then will you be able to reap the benefits that the capital reserve can provide for your business.

Now you know what a capital reserve is and why it’s so vital to a company. The next step is to plan how to build it to ensure your business’s financial health is always up to par. So start setting your goals and outlining your financial strategy now.