- Special and general reserves can be used as a source of finance for a company.
- Reserves refer to funds that a company has set aside from its profits for future use.
- Special reserves are earmarked for specific purposes, while general reserves are more flexible and can be used for a variety of purposes.
- An example of a general reserve is the general reserve, while an example of a special reserve might be a motor vehicle reserve meant to help fund the purchase of a new vehicle
Features of special and general reserves as a source of finance:
- Retained earnings are the most common source of reserves. These funds are accumulated over time and are available for future use.
- Special reserves are typically created for a specific purpose, such as to fund a major project or to cover a potential liability.
- General reserves are created to provide flexibility in funding future activities or investments.
- Special reserves are usually not available for general use. For example, a company may create a reserve for the replacement of a specific piece of equipment.
Situations where special and general reserves would be most appropriate as a source of finance:
- Funding major projects or initiatives. Companies can set aside reserves specifically for these purposes, allowing them to be more financially prepared for large expenditures.
- Meeting unexpected expenses. Reserves can be used to cover unexpected expenses, such as legal fees or insurance claims.
- Providing flexibility in funding. General reserves can be used for a variety of purposes, providing companies with flexibility in funding future activities or investments.
Benefits of special and general reserves as a source of finance:
- Retained earnings are a low-cost source of finance since they are generated from profits.
- Reserves can be used to fund activities that may not be possible with other sources of finance, such as bank loans or equity financing.
- Using reserves allows companies to maintain control over their operations without diluting ownership or taking on additional debt.
- Reserves can signal to investors that the company is financially stable and has a long-term vision.
Drawbacks of special and general reserves as a source of finance:
- Reserves may not be sufficient to cover large expenditures or unexpected expenses.
- Reserves may not be readily available, as they are typically accumulated over time.
- Companies may need to use reserves for unexpected expenses, leaving less available for future activities or investments.
- Using reserves may signal to investors that the company does not have attractive investment opportunities or a clear growth strategy.