The company’s financial stability can be ensured by having a significant sum of the reserve fund relying on their capital and turnover, which provides a cushion against unexpected expenses.
Such reserve fund can act anytime as a buffer against unexpected expenses or revenue shortfalls. For example, suppose a company experiences a sudden decline in sales or has to deal with a significant repair or replacement. In that case, the reserve fund can do a considerable help. Every company needs to cover unexpected expenses without borrowing money or cutting back on other costs of vital business activities.
Taking on debt can be risky for a business, especially if the company cannot pay it back on time due to a sales drop. It is always best to avoid default on loans and other debts, which can have severe consequences for financial stability.