What are "financial reserves" used for?

Financial reserves are a critical component of effective budgeting and financial management. They are specifically set aside to ensure that an organization has sufficient funds available to address unforeseen challenges. This includes covering unexpected expenses or potential downturns in revenue, which can impact the organization's ability to maintain its operations or fulfill its financial obligations.

Reserves act as a safety net, allowing organizations to navigate through periods of uncertainty without immediately resorting to borrowing or drastic cuts to essential services. This aspect is particularly important for government entities and non-profit organizations, which often operate with tight budgets and depend heavily on stable revenue streams.

Covering planned expenditures is a function of budgeting, where anticipated costs are accounted for in the regular financial plans. Investing in new projects and distributing dividends, while important aspects of overall financial strategy, do not align with the primary purpose of reserves. Reserves are not intended for use in routine project funding or for returning profits to stakeholders; rather, they are there to maintain organizational stability and operational continuity in times of financial distress.