contingency fund

Reviewed by Vishnava | Updated on Mar 01, 2023


Introduction to contingency fund

  • Contingency funds are funds created to cope with any unforeseen scenarios or emergencies that a business may run into at any point in time. Businesses hold this fund in the form of liquid assets or cash.
  • The role of a contingency fund is to improve an organization's monetary stability by building up a safety net for the firm so that it can use it to protect itself against adversities. This reserve is additionally utilized to lessen the need to take out high-interest advances and loans, like for example credit cards, to cover startling costs.

Understanding Contingency Fund

  • A contingency is a potential adverse situation that a business might happen to face later on, like an economic recession, pandemics, natural disasters, terrorist attacks or fraudulent activities. In order to protect the organisation and its day to day working, investors study and map out plans for different contingencies by analysis and carrying out defensive measures. For this purpose, they create a contingency fund within the organisation and set aside some cash or liquid assets to counter the blow from any unforeseen circumstances a business may face.
  • Emergency courses of action can incorporate the purchase of options or insurance protection for venture portfolios.

Importance of Contingency Fund

Shields you from assuming extra debt

A significant utilization of a contingency fund is to shield you from depending on credit to meet unforeseen money prerequisites. In the event of a crisis, you don't generally have a lot of cash within reach, and are consequently compelled to take a loan or use a credit card to address such issues, leaving you to pay the interest for years to come. Hence, a contingency fund assists you against taking on too much debt.

Assists you with financing significant crisis

A contingency fund enables you to meet emergency financial requirements. It offers you the capability to meet a huge monetary crisis without hindering too much of your daily expenses. Without a contingency fund, the unforeseen emergencies may make a hole in your monetary situation, making it difficult to carry on with day-to-day activities.

Reduces financial stress

A contingency fund helps the business to remain calm when facing unforeseen setbacks. It reduces the monetary stress which helps the business to think and plan carefully the next course of action.

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