How Much Money is Enough for Rainy Days?

Do you have an emergency fund? You know what it is: it’s the money you keep aside for ‘just in case’. For instance, in case you lose your job, lose income due to a medical condition, due to the death of a family member, or some other, slightly more severe, unforeseen expenses. If we are to believe those who have taken it upon themselves to financially educate us (which we certainly need), everyone should have an emergency fund, without exception, and that should be three to six months’ worth. Recently, financial influencer Sandra Ferenčak, known as Tetka, wrote about this on LinkedIn, explaining how the amount of the emergency fund largely depends on the ability to quickly find new employment, another paid project, or another type of capital without excessive debt. For some, Tetka says, it is enough for their emergency fund to cover three months’ worth of expenses, while others need their money set aside to last up to six months. For entrepreneurs, she noted in a post on the social network LinkedIn, the emergency fund should be able to cover even twelve months of financial expenses, which motivated us to ask both entrepreneurs and stronger players in the market whether they have an emergency fund and for how many months.

Entrepreneurs Always on Alert

From the responses we received, it can be concluded that domestic companies have certainly learned lessons from past crises. From, if you will, the Homeland War to the global recession that affected the entire world in 2007 and ‘landed’ here in 2008 and remained until 2014, the crisis in Agrokor, the corona crisis… Domestic companies are always on alert and at a time when economic trends were much more favorable than today, they retained part of their profits in their accounts, which Lider has already written about, and which is the clearest example of setting aside capital for bad days. Of course, we are talking about companies whose shareholders understood this. Additionally, during times of favorable interest rates, companies restructured their debts, invested, digitalized, and, of course, saved wisely (because savings happen when the climate is favorable, not when a crisis begins; that’s when spending decreases), making it easier to face a crisis because some money has been set aside.

– It is excessive to expect that companies and entrepreneurs have emergency funds that can cover twelve months of financial expenses – commented Danko Sučević, director of BDO Infokorpa and an expert in crisis management and corporate governance.

He explained that the accounting vocabulary does not recognize the term ‘corporate emergency fund’, but rather ‘reserves’ as prescribed by the Companies Act. Legal reserves are the minimum that must be ensured for uninterrupted business operations, but companies, especially responsible ones, can hold other amounts and forms of assets under reserves, if it is something that can be quickly and easily liquidated.

– Companies that manage their assets responsibly always keep part of their assets in liquid funds; if they can afford it, of course. This is an asset that is untouched, whether it is money in a checking account, liquid bonds, or stocks. How much capital companies will tie up in this way depends on various factors, such as which industry they are in and how volatile it is. Startups, for example, cannot set anything aside because they lack cash, while the food industry is not volatile, but it is not expected that companies in that sector need to set aside large amounts because it is a low-risk industry – explained Sučević, warning that companies cannot tie reserves to real estate and similar assets because that is not and cannot be readily available financial assets.

In his opinion, for an industry that does not have its own production and maintains liquid assets, it is sufficient to allocate one month’s worth of salary expenses for the so-called emergency fund, or reserves.

– For example, that’s how we operate at BDO Infokorpa; we keep one month’s salary and cold operation expenses in reserves. Even we might be exaggerating a bit, but we do it just to sleep peacefully – emphasized Sučević.

Save When There is No Crisis

The founder and director of the consulting firm Konter, Nikola Nikšić, thinks similarly to Sučević. If a company needs more than one or two months to cover salary and cold operation expenses, then something is chronically wrong, and one should ask whether it makes sense to continue operating like a zombie. He agrees that every company or entrepreneur should have financial reserves, or readily available capital, and notes that this is most often secured through retained earnings, liquidity loans, or assets that can be quickly liquidated. In his opinion, this should not include real estate.

– By retaining earnings, entrepreneurs will most easily secure money for financing development and working capital. Therefore, it is important to save when there is no crisis and to manage liquidity wisely – said Nikšić, adding that it seems to him that domestic companies have learned what it means to overindulge in consumerism, wastefulness, and economically unreasonable investments since the 2008 crisis.

– Since the last recession, companies have increased revenues and profits, strengthened their own balance sheets and financing from their own sources, resulting in higher profits. Additionally, domestic companies, generally speaking, have increased their cash balances, reduced financial debt, and improved liquidity. All of this suggests that they are more prepared for a crisis and that they will be able to more easily weather any potential financial problems – believes Nikšić.

If we are to judge by Nikola Glavaš, head of the Financial Consulting Department at the consulting firm Apsolon, in times of uncertainty, an emergency fund can be a relatively effective anticipatory approach to mitigate external risks and ensure a peaceful sleep for entrepreneurs in the coming months. How many months the fund should be able to cover is hard to say because it depends on the specifics of the industries and the companies themselves. Companies with higher turnover of receivables and inventory, such as those in hospitality and retail, will relatively quickly sell their products and generate the cash flow needed to finance operational costs, while manufacturers and wholesalers, with lower turnover indicators, may require a more substantial cash reserve to survive the period of uncertainty. However, an emergency fund that can cover twelve months of operating costs, according to Glavaš, seems excessive, especially considering today’s environment where annual inflation rates reach double-digit values. In such an environment, money in the account actually creates a significant loss of value that could have been directed towards development or the acquisition of more energy-efficient and productive equipment, which would create an opportunity for generating additional value, or returns on investment.

Of course, at Lider, we do not assert or conclude anything without examples, and how much of an emergency fund or how much cash reserves domestic companies have for rainy days can be read in the printed and digital edition of our business weekly.