Times are good. Business is good. There has been a growth from last year and everything is sailing smoothly. Until, your boat hits an ice rock. The ice rock will create an emergency situation. The situation which 'Maggi' got Nestle into. They did not saw it coming. The Maggi problem became so big and so soon, that before they could react to the controversy, their sales dipped. Not only they dipped, they had to destroy hundreds of tons of material only because of that.
What has happened today? Do you hear Maggi? Yes. Similar problems were faced by some big giants like Cadbury, when worms were found in their chocolates. Any lesser company could have died a natural death. But Cadbury didn't. They bounced back. What is that which makes these big giants resilient against any emergency situation. It is their reserve fund. These biggies have large reserve funds. They are sitting on cash piles. The reason is that their brand is famous. They get credit from all the directions. And they don't have to give credit to anyone. This makes their cash flow positive. The positive cash flow is a huge plus to any company.
This reserve funds are important when these catastrophic situations are created. They need to react to it. One thing is that in such situation, their normal revenues are affected. For a small company, this becomes a matter of life & death. Because their cash flow is not as positive as that of the big companies. If you do not get oxygen, you will die. In times when you are flying, many people will come forward to give you credit. But, when situations are worse and you have the need, may be many people will move back. Secondly, to end the controversy, many steps have to be taken. And these all steps need money. It becomes necessary then that you maintain a healthy reserve fund. If you do not have surplus cash, you set a target for any minimum amount which you have to keep aside. And gradually increase that amount.
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