What is a capital reserve?

When we establish a business or set up a company, everything is planned perfectly. We need to understand all the possible expenses and income sources. These things are always discussed deeply before starting any company. It doesn’t mean that you have to sit and make assumptions for future losses and gains. It simply refers to the possible expense in the company. For example, you must have an idea regarding how much money you need to pay your employees.

Talking about the capital reserve, it can be simply explained as the money saved for the unexpected expenditures of the company. In other words, it can be explained as that part of the equity section which is saved for all the unexpected expenses in the company. This capital reserve comes from the money earned due to the growing company. The amount of capital reserve varies from company to company. It depends upon the turnover of the company.

It also depends upon the types and amount of expense done by the company. To decide the amount of capital reserve, we need to think about various things.

Suppose you are the founder of a company and now you want to have some capital reserve for your company. Don’t worry, it’s not very tough. You will need some of your employees who know about your company, its profit and loss.

Now, putting the first things first, you need to make a list of all the possible expenses. By doing this thing, you will have a clear idea regarding how much money your company will spend monthly. You can also talk to your employees and discuss the amount which you calculated. The next thing you have to do is to make a list of all the possible unexpected expenses. Now, you might think that what can be an unexpected expense? Well, suppose your business was doing good and suddenly it started facing losses. Due to these losses, you will not have enough funds for buying new materials etc.

In this situation, this is an unexpected expense and your capital reserve will help you in solving this problem. Using the capital reserve, you can buy new materials without taking debts from others. The benefits of the capital reserve aren’t just limited to this, there are many other benefits.

But the question remains the same, how to decide the amount of capital reserve? Generally, the amount of capital reserve is fixed according to the number of unexpected expenses in three months. Simply, you have to calculate the number of unexpected expenses for the next three months. This amount is the amount of capital reserve.

This method is used by many businessmen and companies. You may also decide the amount of capital reserve as per your choice. But as here we are talking about business, we must focus on the practical things. This simply means that you should decide the amount of capital reserve as per the calculations.

What are the differences between Capital reserve and Revenue reserve?

Just like capital reserve, revenue reserve is also a type of saving done by the companies. Revenue reserve can be understood as the money which a company saves for situations when their company is facing losses. They use this money to pay all those shareholders.

This money comes from the different sales done by the company. Keeping revenue reserve is one of the wisest decisions made by a company. You might not see its benefits in short term but if you consider it in long term it has many benefits. A company should have both capital reserve and revenue reserve.

Since now you know about revenue reserve, the next thing that strikes your mind is how to keep revenue reserve? The amount of revenue reserve is generated from the amount earned after a profitable sale. For example, consider that you have a company that manufactures shoes.

Now, in the year your company did well and gained lots of profits. Since the financial condition of your company is well this time, you should keep some amount for revenue reserve. You will take some part of your net profit and keep it aside as revenue reserve. The rest of the profit can be used to pay the shareholders. This will make your bonds strong with them. They will think that you give them the importance and will share more profit in future. The more strong your business relationships are, the more it will help you in growing.

In case, there is a time when you don’t have enough profit, you can use the amount of revenue reserved to pay the shareholders. By doing this, you can save your company from getting in any loss. Even, you don’t need to take debts from others in the market. Once your company does well and earns profit, you can again keep your revenue reserve.

Till now, we have discussed so many things related to capital reserve and revenue reserve. You might have found these two very similar. Despite the similarities, there are many differences between them. They are not completely similar.

Further in this article, we will discuss the benefits of both capital reserve and revenue reserve. We will also discuss how the capital reserve is different from revenue reserve? At the end end of the article, you will know both the capital reserve and revenue reserve and their differences.

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Here are some differences between the capital reserve and revenue reserve:

Reserve is generated from the amount earned due to profits while the capital reserve is generated from the amount earned from non-operating activities. You might be confused. Let’s try to understand it simply.

Suppose you have a company that sells cosmetics. Now you decide on an amount from the equity section and keep it as the capital reserve. In a year, your company did very well in sales and you got much profit. This time you keep some amount earned due to the sales and keep it as a revenue reserve. In this way, you decide the amount for capital reserve and revenue reserve.

There are many benefits of capital reserve. A person can arrange the amount for capital reserve in various ways. They can earn it after selling some fixed assets. It can be earned by selling many other things and saving that money. It can be earned by buying a well-settled business at profit. All of these sources will help in arranging a good amount for capital reserve. This amount can be used to face any certain loss in business. It can be also used to grow the business.

In short, the amount of capital reserve can be used to solve many problems.
Revenue reserve comes from the operating operations of the company. Operating operations refers to the ongoing sales in the business. Suppose, you earn a good profit in your business. This amount can be used to generate the revenue reserve. The amount kept as revenue reserve is used in expanding the business.

It is like, you have funds for the time when your company is running at loss. This can be helpful. You can pay the shareholders using this money. Once your company performs well and creates profits, you can again keep some amount as a revenue reserve. But, having both capital reserve and revenue reserve is much beneficial for a company.