A contingency fund is a reserve of money set aside for unexpected expenses. In addition to a positive cash flow, savvy businesses will maintain a contingency fund in order to afford expenditures that are beyond the standard operating budget. Unexpected expenditures may include:
- An increase in the cost of supplies or equipment
- New technology
- Repairs or replacement of crucial equipment
- Unanticipated legal/ business fees
- Diminished sales
- Worker strike
Types of Contingency Funds
The Best contingency funds are liquid assets such as cash and reliable stocks. Unlike other assets, cash allows a business to handle unexpected occurrences as efficiently as possible.
The liquidity of stocks and bonds is subject to change. The most liquid stocks and bonds tend to be the ones that are most highly traded.
Ideally, a contingency fund will be managed to grow over time. However, a contingency fund should remain as stable and as liquid as possible. In other words, your contingency fund should have the ability to immediately convert to cash.
Alternatives to Contingency Funds
Without a contingency fund, a business must resort to alternative methods for covering unexpected debts or costs. Alternatives include:
- A line of credit
- Business Interruption Insurance
Seeking Legal Help
If you need assistance developing or maintaining an effective contingency fund for your business, you should consult an experienced business attorney.