Prepare for a Rainy Day

While reading an article about the funding levels of various cities around the county to finance future retirement and medical benefits, it was shocking to see how many had very little set aside. Some even had nothing funded for health care. This is a potential disaster that threatens the financial stability of these cities. In fact, if a city fails financially the repercussions will impact other areas of society as well.

What Does The Have to Do with Me?

These cities were so caught up in appeasing the present needs and wants of people that they failed to look to the future. Notice the word wants in the previous sentence. This is highly likely a lot of what caused this problem of not being able to meet future obligations. Governments often find it hard to say no to demands and end up over committing. They simply cannot expect to be able to fund all these promises. I suspect much of the reason they make them is to make the present day problems go away. However, this is done at the expense of the future. There is no guarantee that collections from taxes and fees would be able to meet the obligations even if they stayed at the same level as when the commitments were made. They simply have failed to prepare for a rainy day. When they finally have to start paying the obligations many will likely have empty pockets.

Broke Business ManSo, here is what this has to do with you. Every business is going to have unanticipated future costs. Because of the unexpected, every business needs to set aside resources to provide for this. This is difficult to accurately, so every business will have to make some educated guesses. This reserve doesn’t necessarily have to be cash, but it is best if it can at least be quickly converted to cash. But there is something easier to anticipate.

Planned Expenditures

Planned does not necessarily mean it will be done, just that it is likely. For example, if you know for certain you are going to need to buy a new piece of equipment or believe this or a replacement are likely, you can certainly make some fairly accurate estimates.

If you have ever heard of a sinking fund, you know it refers to a method of setting aside specific amounts to pay off debt obligations when they come due or to provide for the replacement of existing assets or purchase of additional assets. In the case of these cities we discussed, they would have been wise to set aside funds for the future amounts they would owe for employee retirement and health care benefits.

In private industry there may also be the need to set aside funding for retired employees. However, one of the main things that so many companies fail to do is to establish sinking funds for the replacement of old assets or purchase of new assets. If this is done, then when the need arises, loans can be minimized or perhaps even avoided completely. This is a primary way to prepare for a rainy day.

How about your company/ Are you making provisions for both expected and unexpected future demands?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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