Six Reasons Why You Should Have a Contingency Budget For Your Business
Thursday, March 26, 2020, 6:00 AM | Leave Comment
Businesses often claim that they have plenty of additional budgets to cover essential business costs and keep it going successfully.
But the reality is far from it. Apart from the necessary expenses, there are several other expenses for which capital investment is not sufficient enough to cover unexpected business costs. That is why every smart business owner should plan for contingencies and have emergency funds to cover the unexpected expenses.
First, let us understand what a contingency budget is and why it’s essential for any business. It is a budget that kept expressly to fulfill unexpected costs that a company might incur.
For example, a business might experience a delay in a project because the raw materials are insufficient, or there is a shortage of materials. Similarly, there can be an unstable environment in the country that can hamper a company’s projects or may halt production activity due to natural disasters like earthquakes, floods, cyclones.
Additionally, political instability in the country can also negatively affect a company’s business.
If we establish a definition of a contingency budget, we can say that it is an additional amount of money necessary to fulfill uncertain needs and wants and is not designated to one type of plan. It can nourish any sort of expenses that are not planned and are not budgeted.
Many business concerns claim that having a contingent budget of about 10% is a good number. Still, the same business concerns claim that this budget is the most neglected aspect when allocating the budget.
Many times this 10% additional budget is good enough, but sometimes it is just not enough due to the intensity and need of the project or plan. If it happens, it may delay the completion of the entire project that may damage the overall health of the business concern.
Utilizing emergency loans and funds can become the lifesaver in the days where the business concern is on stake. For this purpose, a company does need emergency business funding is required. A company can get approved for an emergency business loan if its credit score is high. Therefore, to get approved for an emergency loan, a company should keep its financial records debt-free and have a good credit score.
Following are essential reasons why its utmost necessary for any business to have a contingency budget:
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Pro-Active Approach For Channelizing the Business Potential
Business concerns are highly dependent on the planning and organized workflow to achieve specific targets and accomplish goals. If you are a stakeholder of a business concern, you must be aware of all the ins and outs of it, and even you must be mindful of the peak and off seasons for the business concern.
Establishing a business model with a pro-active approach for difficult days can help you to stay stable. Many times, the business models collapse due to a lack of funds in the offseason. Still, if you have a contingency plan for such days, you will not have to worry about the financials of the organization. For instance, if the company has to shut down the sales operation due to a pandemic situation, then you must have a contingency budget to pay off the essential expense.
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Financial Flexibility
Apart from a pro-active approach, the contingency budget helps the organization to stabilize if the organization faces any external issues such as changes in governmental policies. If the organization is highly dependent on the policies issued by the government, then a contingency budget is a must as the organization may have to fulfill individual needs mentioned in the system.
As a core, the contingency budget provides financial flexibility to cover up the financial dip to the economy. If the organization does not have any backup plan to fight against dropping the economic situation, then it may have to face hard times. Allocating some amount as a supportive budget will help the overall business concern to play in the market with full strength and establish better goodwill with the clients and customers.
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Quick Response to Address Unanticipated Financial Need
Business concerns having a well-maintained and organized plan of action and contingency budget are more stable than the organizations without a plan. This budget is not only reserved for particular objectives, but it is the amount that creates an impact on unwanted and unplanned events.
Many business concerns utilize this budget to meet the marketing needs of the business. And usually, the contingency budgets help a business to meet the unexpected costs. If the stakeholders approve the contingency budgets, then they have better performance and higher productivity as they do not have to worry about the financials for completing individual projects.
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Spend the Budget Wisely
It is not the problem that creates panic; it the thought process of not having a solution that creates fear. If the organization is out of cash and does not have a backup plan or a contingency budget, then it may have to take specific actions that may not be in favor of the organization as a whole. Still, if the organization is well-equipped with a contingency budget, then there are very few chances that panic may occur as the organization can stabilize utilizing the available funds.
The contingency budget proves to be a lifesaver for the organization that undergoes severe issues. Hence, companies that are unable to regain the original structure without financial support need to set aside a contingency budget for their company.
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Minimizing Business Loss
If a business faces financial crunch because of policy changes, or due to the relocation of your office space. Then having a devised budget for the economic dip time is the best solution through which you can not only reduce the overall losses of the organization but can utilize the available funds more effectively.
Business tycoons claim that, more often, the economic crunch has a brief span. Still, it gives very long-lasting damage to the overall structure of the organization that does not have a backup plan readily available for rescue. Nevertheless, if you have not been able to allocate a budget for unforeseen events, then it is high time to take notice and plan accordingly.
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Planning Ahead of Time
Have you ever thought why all the decisions taken on an immediate basis are highly risky, and many time does not work? Similar in the case of financial decisions where things do not work appropriately and creates a significant loss for the business concern. Running a business concern without backup financial support is a high risk as if the issues are not timely resolved, then it may cause the organization to collapse.
Making a plan of action that is relevant and functional with a designated contingency budget is highly recommended by the business owners. If the company undergoes offseason and sales are dropping, then the organization must have a sufficient amount to pay off the bills and utilities before deciding to do right-sizing as right-sizing is one the most common practices when the organization foresee financial dips.
Conclusion
In this article, we have tried to explain how and why business models and business concerns are required to allocate contingency budgets for maintaining a good workflow even in times where many similar business concerns may face financial crunch due to external forces. Contingency budget may seem like an additional expenditure.
Still, in the long run, it is one of the best possible ways to maintain smooth transitions and transactions without disturbing the overall business. Allocation of a 10% budget may look like a substantial dead investment, but eventually, it is the reserved amount that is for rough times.
If you are willing to establish a business concern or you are a stakeholder to a well-established business concern, then having this knowledge will help you in the long run with prosperity and effortless transactions.
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