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What is a security cushion?

This is an amount that is equal to the total costs of the company for a certain number of months, and which must be set aside and saved until an unforeseen event occurs. Should such a situation arise, it is this reserve fund that will enable the business to survive and not go bankrupt.

When is a security cushion useful?

Decreasing demand

Unexpected increase in rent

Equipment malfunction

Problems with delivery

Legal challenges

Shortage of funds for payment of salaries

The size of the financial airbag needs to be calculated

Divide your business expenses into fixed and variable costs.

Variable costs depend on the volume of output and sales. They include raw material costs, acquiring interest, and transportation costs. Use fixed costs, which do not change with decreasing output and sales volume, to calculate them.

Recurring costs are:

  • insurance fees
  • employee wages
  • rent and utility bills
  • depreciation charge
  • payment for services of third parties

How to create a financial airbag

Create a financial reserve for your business with regular contributions from profits. There are two options: pay a fixed percentage, such as 5% each month, or a larger amount depending on circumstances. Analyze your income and expenses.

  • analyze the services you use
  • examine the income and expense book
  • think about what else you can save money on
  • Determine which expenses can be deferred
  • sell company property that you are not using

Savings should be used to build up a financial reserve.

While it's difficult to predict global threats such as natural disasters or political upheaval, it's worth thinking about how you'll cope if sales don't reach expected levels or production declines.
Only highly liquid assets, such as funds in bank accounts or deposits, should be used to build up a financial reserve. These can be cashed out quickly. Less liquid assets, such as stocks or bonds, are more difficult to realize and will take time. The best option for storing funds is bank deposits, which earn interest and are insured by the deposit insurance system in case the bank's license is revoked.
As a rule, it is recommended to have financial reserves sufficient to cover expenses for 3 to 4 months or, in the worst case, 6 to 12 months. It is unlikely that the enterprise will experience problems for longer than this period of time, so the free funds should be invested in the development and growth of the enterprise.

Manage your company's finances properly

A financial safety cushion is an important factor in helping your business survive.


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