Profit reserves are accounts that represent the percentage of net profit “saved” for two reasons: to offset losses and to increase initial capital. In addition, it is an accounting obligation of Public Limited Companies (SA).
It falls within the scope of work of the accountant that profit is made available, but to him, this is one aspect of revenue. To explain this issue in detail, let us clarify what profit reserve refers to.
Another important aspect is that, if the company is not a public limited company, it is interesting to understand how this activity works. This is because any business needs to have cash in hand for unforeseen events.
Keep reading to understand how to do this and also to better understand the concept of profit reserves, how to account for the value and the main types. Enjoy your reading!
What is profit reserve and why is it important?
The profit reserve is one of the accounts that make up a company’s net worth .
Net worth is the result of the difference between assets (inflows, such as sales and receipts in general) and outflows (purchases, expenses and debts).
This accounting indicator is formed by what we call accounts , which make up the company’s assets and liabilities. The profit reserve is one of them.
There are 8 types of profit reserves, however the legal one is the only one mandatory. The amount corresponds to 5% of the company’s net profit within a fiscal year. It cannot exceed 20% of the paid-up share capital.
Profit reserves are important not because they are an accounting obligation, but because this percentage helps to offset losses and also increase the company’s share capital . This is essential when obtaining loans from financial institutions and also when participating in bids.
Types of profit reserves
There are 8 types of profit reserves, but, as we said, only the legal reserve is mandatory for SAs . Continue reading and check out the concept of each one.
Legal reserve
The legal reserve corresponds to 5% of the net profit for a financial year and cannot exceed 20% of the company’s share capital.
This percentage of profits must be “reserved” before distribution among partners and/or shareholders.
Statutory reserve
The statutory reserve is a percentage of net profit defined by the company itself , with a specific purpose. Unlike the legal reserve, this amount is set aside before the distribution of dividends.
Contingency reserve
The contingency reserve is a separate amount to help the company in the event of imminent situations involving increased fixed costs or risks of possible losses.
Profit reserve for expansion
As the name suggests, the expansion reserve is an amount taken from the company’s net profit to be invested in its growth . However, it is worth remembering that the percentage defined should not harm the progress of the business activities.
Tax incentive reserve
Tax incentives are all benefits of reducing or even exempting the tax burden for companies that stimulate the development of the country’s economy in some way.
One example is regional incentives, aimed at companies that develop in less explored regions of the country, such as the Amazon and the Manaus Free Trade Zone.
Profit reserves for expansion comprise precisely amounts obtained by the company from such banking incentives granted by the government.
Reserve of premiums on the issuance of debentures
Debentures are credit securities issued by publicly traded companies on the stock exchange . When acquired, in order to avoid being taxed, they can be accounted for as a premium reserve on the issuance of debentures.
Reserve of unrealized profits
Unrealized profit reserves correspond to the amounts relating to net profit that have not yet been received by the company and which, after receipt, will be divided among the partners.
Special reserve for mandatory dividends to be distributed
Finally, the special reserve for mandatory dividends to be distributed corresponds to the amounts to which the partners are entitled , however the company does not have cash for payment.
Difference between profit, capital and financial reserves
Both the capital reserve and the profit reserve correspond to the business’s equity accounts .
The main difference between these two is that the capital reserve encompasses all resources obtained by the company that do not necessarily come from revenue, i.e., sales. Amounts invested by partners and shareholders are examples of capital reserves.
The profit reserve values, as the name suggests and as we explained, come from the company’s revenue and sales.
Unlike the other two, the financial reserve is nothing more than an amount that the company needs to have in cash for unforeseen events. In the next topic, see how to organize yourself financially to have this money saved.
If your company is not required to reserve profits, keep saving
We cannot predict what may happen in the country and the economy. However, the company can prepare for possible unforeseen events through a financial reserve.
Having a financial reserve is essential in times of crisis , not only to pay the bills, but also to give the entrepreneur time to think clearly.
After all, with so many bills to pay, no money and in the midst of a crisis, the business owner, worried about solving these problems, may make decisions that are not very assertive. One example is taking out loans with high interest rates.
We have put together some tips that can help you build your company’s financial reserve:
- Account for all monthly variable and fixed costs;
- Analyze your debts and, if necessary, negotiate better payment terms with the financial institution;
- Determine how much you will save each month and do not use this amount for other purposes.
Ideally, the company must save at least 6 to 12 times the amount it spends every month. That way, the entrepreneur can be certain that at least six months or one year’s worth of his bills will be paid fully or partially.