provision

Money set aside by a company to pay for tax or dividend payments that it will have to pay in the future.

A company may use its provisions to add to its working capital, effectively borrowing the money it owes rather than increasing its bank borrowings. However, this strategy carries some risk since the company would become insolvent if, when the time came for the tax to be paid, it did not have the liquid assets to pay the tax. A company may also make provisions against the possibility that some of the money owed by debtors may not be paid, thus becoming bad debts.