{"id":17257,"date":"2024-02-01T17:16:39","date_gmt":"2024-02-01T17:16:39","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=17257"},"modified":"2025-05-07T14:54:29","modified_gmt":"2025-05-07T13:54:29","slug":"capital-and-reserves","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/capital-and-reserves\/","title":{"rendered":"What are revenue and capital reserves?"},"content":{"rendered":"
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\n\t\t\t\t\t\t\tMoney Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t
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\n\t\t\t\t\t\tWhat are revenue and capital reserves?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\t

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\n\t\t\t\n\t\t\t\t\"\"\t\t\t\tTim Cooper<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

To build a successful business, you need to be ready for the unexpected\u2014and your cash and capital reserves help you do this.<\/p>\n\n\n\n

But it’s easy to get confused by the sheer volume of terms and calculations in reserve accounting.<\/p>\n\n\n\n

This article explains how keeping reserves can help small and medium-sized businesses, and how they work.<\/p>\n\n\n\n

Overview of reserves<\/h2>\n\n\n\n

Think of your reserves as like the suspension in a car, smoothing out bumps in the road and stopping the wheels falling off.<\/p>\n\n\n\n

Keeping some of your profits in reserve, rather than paying them out as dividends immediately, enables you to cover unplanned costs when they arise and avoid dipping into salaries or cutting dividends later.<\/p>\n\n\n\n

This will help you cover smaller daily upsets such as repairing a broken machine, or legal fees around a dispute. But if you save enough, reserves will also help you stay afloat in difficult financial times, say if you have a few lean months or even years due to a pandemic or financial crisis, for example.<\/p>\n\n\n\n

Keeping reserves helps in many other ways too. Business owners often make the mistake of spending surplus profits in an unplanned or undisciplined way. Keeping reserves helps you focus on your business’s needs.<\/p>\n\n\n\n

For example, you can use reserve accounts to ensure money remains available for reinvestment in growth, or productivity or efficiency improvements. This can ultimately impact your long-term profitability, scale and agility.<\/p>\n\n\n\n

Andrew Shepperd, co-founder of Entrepreneurs Hub, says: “Although you can use all your retained profit to pay dividends, we always recommend leaving headroom in reserves for unexpected future losses, which could make your business insolvent.<\/p>\n\n\n\n

“You may also want to re-invest some retained profits to enable growth by buying fixed assets<\/a> or working capital, rather than borrowing money to do so.”<\/p>\n\n\n\n

Another consideration is your credit rating, adds Andrew. If you have low reserves or they decline significantly due to dividends being higher than profit after tax, that may alarm some credit rating agencies.<\/p>\n\n\n\n

Revenue reserves and how businesses use them<\/h2>\n\n\n\n

Accountants and business advisers use various phrases such as “company reserves”, “revenue reserves”, “capital reserves”, and “capital and reserves”.<\/p>\n\n\n\n

Here’s an explanation of how companies and their advisers typically use each phrase in practice.<\/p>\n\n\n\n

Revenue reserves <\/strong>are sometimes called profit and loss reserves, general reserves or retained earnings<\/a>.<\/p>\n\n\n\n

The Institute of Certified Bookkeepers’ defines<\/a> (distributable) revenue reserves as the net profits you set aside after paying dividends.<\/p>\n\n\n\n

Doing this creates a general cash buffer for unexpected items or difficult financial periods.<\/p>\n\n\n\n

Healthy revenue reserves can also enable you to:<\/p>\n\n\n\n