A strategic reserve is a store of capital and other assets like securities that a business holds back for use on a specific project or to make funds available in the event of an emergency. They are not part of dividend payouts and may be protected so they do not count as part of the company's net worth. The practice of creating and maintaining strategic reserves is common in a variety of industries. They can make it possible for a company to engage in long term investment and development activity.
One example of a strategic reserve is a capital reserve, or raw capital a company can set aside. The company does not consider this capital as part of the funds available for dividend payments and may have a specific use in mind for it, such as investing in an ongoing project. These reserves are also critical in an emergency, as they allow the company to act quickly to respond to a situation. The company may use funds to recover from a natural disaster, or to pay for regulatory compliance when regulations change and the company faces new restrictions.
Ring fenced funding is another form of strategic reserve. This funding is placed in accounts with protections to prevent it from being considered part of the company's net worth. The company can move the money between protected accounts without penalty. These funds may be useful for investment activities or situations where companies are ready to make dividend payouts but need to preserve funds for use in future development.
The company can use a strategic reserve for purposes it specifies, and the protected funds may make a significant difference during periods of economic hardship. Companies without access to reserves can have difficulty adapting to emerging market conditions and may be forced to borrow, issue bonds, or seek additional investors to support them. These companies may emerge weaker and less capable of coping with the next emergency or change in the market. This can set them up for failure and costly losses for shareholders and administrators.
Companies are not the only institutions with an interest in strategic reserves. Government agencies may have reserves of intervention stocks, or stocks they purchase to correct adverse market conditions. Government interference with markets can be a complex topic, but many governments do buy and sell securities on the market when they sense a developing problem. As the market stabilizes, they can release securities held in their strategic reserve and allow the market to correct itself again and reach a state of equilibrium.
