In the corporate context, talks about budget reserves and management reserves involve personnel as varied as cost accountants, strategic managers, department heads and financial analysts. Eager to prevent a liquidity crunch in corporate operations, these professionals take a hard look at financial reports, determining whether the business has sufficient resources to soldier on, competitively speaking.
A budget reserve is a rainy-day fund a company sets aside to finance operating activities if adverse, unexpected events cripple its liquidity position or make it difficult for the business to access money in corporate vaults. Simply put, the reserve is money corporate treasurers hoard so that the business can operate for a given period -- say, one, two or three months -- until its cash position improves. Department heads generally estimate budget reserves in absolute or relative terms. For example, the reserves may amount to $10 million or represent three months of a company's annual budget. As of 2011, the National Association of College and University Business Officers recommended that colleges and universities have 25 percent of their operating budget in reserves.
Management reserves represent money, time or budget resources that corporate leadership puts aside to account for parts of a project that department heads and service providers cannot predict. Also known as a contingency reserve, a management reserve helps senior executives prevent unexpected disruptions from throwing a project off kilter. If unmitigated, this scenario might prompt business partner anger or cause operating losses, especially in contractual agreements that require the completion of an initiative within a specified time frame. For example, events such as occupational accidents and severe weather conditions could bring project work to a halt and yield more costs; management reserves help project managers keep the initiative going when these events happen.
Budget reserves and management reserves interrelate in the way a company runs its operations. The former pertains to permanent corporate processes, whereas the latter applies to specific situations and one-time events, such as projects, programs and short-term internal process revamps. By accurately calculating and monitoring operating reserves, department heads ease the minds of business partners. Investors may no longer need to confide worry to corporate management about the fate of the business if economic conditions turn sour.
For budget and management reserves to be effective, corporate leadership often asks department heads to work in tandem and devise the best plan to safeguard the company's cash position in good and bad times. This partnership is conducive to operational sustainability, short-term profitability and proper business continuity planning. The latter scenario is a perfect illustration, because a continuity planning blueprint requires that personnel work collaboratively to preserve a company's critical functions in the event of a disruption.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.