How Much Cash Should a Small Business Keep in Reserve?
In my, and many other finance professionals’, opinion, every small business should aim to keep 3 to 6 months (OR MORE) worth of operating expenses in a cash reserve. The right amount depends on your industry, business model, cash flow stability, and personal risk tolerance. In this post, I’ll guide you through calculating the right number for your business, when to use your reserves, and how to build one even if you’re just getting started.
Check out these other blogs where I talk about cash:
Why Cash Reserves Matter
I could list about 10 stories off the top of my head where cash was a make or break moment for a business. Probably closer to 100… business is ALL about cash. I don’t even know what to write because it just matters. How do I explain that?
Kidding...
Here’s a few stories from clients where having the cash on hand matters (names changed for anonymity):
My client Sarah, initially came to be while paying off a $20K+ tax bill because she had not planned ahead. We put together a budget, revenue forecast, and cash reserve plan and since then she’s never had to be surprised with a tax bill AND has additional reserves both in her business and personally.
My client, Elliot, came to be with ~$90K sitting in a bank account. We did a cash assessment and I told her to put the entire amount in a reserve account and not touch it. She did. 8 months later she lost a few key clients and sales were slow. She came back and told me “I am so glad you made me save that money, I am not stressed right now because I have this money saved”. (and now her sales have recovered!)
My client, Clark, didn’t have a cash reserve. In fact, he was personally funding $10K+ /month in expenses. And running low, personally. He was stressed, couldn’t make good decisions, and everything was a fire drill. Don’t be like Clark. It was a bad scenario.
Here’s the reality: 80-90% of small businesses fail due to cash problems, not because of a lack of revenue or ideas. Your ability to weather slow sales, late invoices, or unexpected expenses hinges on whether you’ve set aside the cash to cover it.
The one thing I know about business through and through is that it is entirely unpredictable, but you WILL have a cash emergency. You just don't know when or where
Consider your reserve a strategic cushion, not a luxury. It's not just for emergencies. It's your tool for staying in control and essential for long term survival.
What Is a Cash Reserve?
A cash reserve is liquid cash your business keeps on hand—not invested, not earmarked for debt or projects—just available for when you NEED it (let me repeat: NEED not just want something you don’t have, those things are very different).
It’s not the same as:
Your tax reserve (if you aren’t saving for now you’re in for a world of hurt)
Your business savings for future investments to move the business forward
Your profit (profit and cash are not the same)
A line of credit (debt, not cash)
Your reserve is your fallback fund when timing goes sideways. It’s what helps you make payroll during a slow month, shift marketing & sales strategies when AI takes over and SEO goes out the window.
3 Key Factors That Determine How Much You Need
Understand your operating expenses:
Rent or office space
Team payroll (including yourself)
Subscriptions, insurance, software
Outsourced contractors
This is your baseline.
At a minimum - keep 3-6 months of operating expenses and then get more strategic with your business model.
2. Revenue Predictability
Revenue is never truly predictable and I’m personally DAMN good at revenue forecasting so I can say that with a lot of confidence.
That’s because of this:
Let’s pretend you make plexiglass and you’re business is going along just fine and then a crazy virus spreads and the people think “hey, let’s put plexiglass everywhere because it just makes sense” (it did not, it was dumb, but good for the plexiglass companies!). Suddenly, your demand SKY ROCKETS and you’re swimming in cash.
How on earth can you predict that? And on the flipside, for the businesses that didn't fare well- you could not have predicted this world changing event.
Covid was an extreme example, but also not that extreme because things like tariff changes, wars, and other factors are happening all the time. The reality is- you can’t ever really know what’s around the corner, but you can do your best and most business don’t do anything
Back to cash: You need to look at the risk of losing revenue and how long it will take to recover your revenue.
Here’s a few questions to get you thinking:
From lead to close - how long does it take a client or customer to buy/sign?
Do you have recurring revenue or a lot of one-time revenue?
If you lost all your customers tomorrow, how long would it take you to rebuild your pipeline?
If you have recurring clients that on average stay for 12 months, are on recurring billing, and pretty steady - you can manage with less.
If you have high seasonal income, all reliant on the sales team that’s volatile -you need more.
3. Your Risk Tolerance
While your CFO (ideally our team), will always err on the side of more is better. Your personal risk tolerance plays a crucial rule in how much you should keep in reserve. Some people are just more comfortable managing with less (you still need some, $1000 is not a reserve).
I also put a huge weight on an owner's personal income and personal savings. If you own 100% of the business and have a large personal cushion - then the business can manage with less and in some cases an owner should take out more cash.
Rule of Thumb:
> 3 months of expenses = Minimum
> 6 months = Ideal
> 12 months = Very conservative (good for solopreneurs or high-risk industries)
How to Calculate Your Ideal Cash Reserve
One of the templates we have in our Finance Fight Club BUILDER community is all about calculating your cash reserves and we have a simple template for members to get here quickly.
Here’s a simple way to find your target:
1. Add up 1 month of operating expenses.
Include rent, salaries, subscriptions, and utilities.
2. Multiply by 3 to 6.
Choose your multiplier based on your risk level.
3. Subtract what you already have in liquid cash.
That gap = your reserve-building goal.
Example:
Monthly expenses: \$20,000
Reserve goal: \$20,000 x 4 months = \$80,000
Cash on hand: \$15,000
Reserve target: \$65,000 more to build
Ideally, also have a separate tax savings account, understand how to estimate your annual or quarterly taxes and save accordingly.
When Should You Use Your Cash Reserve?
Use your reserve strategically for emergencies only, not as a crutch.
Smart uses:
Covering short-term cash flow dips
Emergency repairs
Payroll during a delayed payment
Not smart uses:
Avoiding tough decisions
Funding long-term growth (use financing or reinvest profit)
Covering chronic overspending
If you are digging into your reserves every month you don’t have a reserve, you have a financial management issue.
How to Build (or Rebuild) a Cash Reserve
Well… I have an entire article on my cash management triangle on how to think about cash in your business. And when in doubt: start small. If you have never kept a cash reserve, start with $100/month and get used to saving. Most often you don’t have a cash issue, you have a planning and habit issue keeping you from building a reserve.
Let’s talk about profit again for a moment, because this trips people up pretty quickly. You have to make a profit or what’s the point of running a business? When you make a profit you have to pay taxes on that profit. You’re taxed on the profit, not the cash in your bank. But you need cash to cover emergencies so it may feel like the more cash you have the more taxes you have, but in reality - you likely have never been making enough. Get over this feeling of being in pain with taxes, start saving MORE than you need for taxes and then start with an emergency fund. It does get better, but it might be painful to start
Here’s how to start:
Change your mindset towards setting cash away (see note above)
Profit = GOOD, just save ahead for taxes separate from your cash reserve
Start small -even $100/month is better than no $
Make a better business budget and sales forecast so you know exactly what you need in revenue to get to your goals
Keep going
Open different accounts - this WORKs despite all the bookkeepers annoyed at me for saying this - have a tax savings account, an emergency only account, and a future investment account - ideally all in a high yield savings business account
Reassess your needs quarterly - or better yet, have my team help. We have a cash reserve assessment we can run quickly to tell you if you're on or off track.
What if You Can’t Build a Reserve Right Now?
Chances are you’re wasting money on things you don’t need, not charging enough, or you don’t have a profitable business model. Start by assessing if any of those things are at play and get crystal clear on the health of your business. If none of those factors are in your business, then you should have AT LEAST $100/month to put into a reserve.
Something is better than nothing and it’s the habit you’re trying to form over the dollar amount available.
FAQ
Q: How much cash is too much to hold in reserve?
If your reserve is more than 12 months of operating expenses, you may be able to take the excel and reinvest into future growth. Consider investing excess cash back into the business in revenue driving activities or infrastructure.
Q: Should I use personal savings to fund my reserve?
No. If you don’t have a business savings account that’s growing, open an account and start adding $100/month to an account. If you have an emergency before you have a full 3 months of operating expenses then you might consider a personal loan, but I ALMOST never recommend it. It’s always better to keep personal and business separate. The business needs to pay you and once you reverse that structure you’re in for a world of hurt.
Q: What type of account should I keep my reserve in?
Open a business money market account or high-yield savings account. Business banking doesn’t get the rates of a personal money market account so don’t get too excited. Once you have $1M in cash in your business, get a business banker on your side to get access to proprietary products. Until then, shop around for the best rates.
Q: Is a credit card a good backup for emergencies?
I personally hate debt - even in business. A credit card, used wisely, is a great tool to extend your cash. It’s not an emergency fund. Treat it like you would a personal loan - only in the worst case scenario.
Final Thoughts
A cash reserve isn’t just an emergency plan—it’s a confidence builder. It gives you the space to make decisions confidently and not panic.
One of my favorite client stories is from my client Hank (name changed), he was burnt out. He was at a point to just give up the business. We looked at his personal and business savings accounts and I talked with him about how he was in great shape. He took a month off, hired an account manager, and recovered. Now he loves his business again. That cash reserve prevented him from burning out and shutting down.
If that isn’t the motivation you need to build a reserve - I don’t know what is.
Struggling with your cash? You’re not alone.
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About the Author:
Natalie Cook is the founder of Finance Fight Club, an Outsourced CFO & Financial Services firm dedicated to empowering small business owners with strategic financial guidance. With 5+ years of experience as a fractional CFO, Natalie specializes in due diligence, cash flow optimization, and preparing businesses for sale. Her insights have helped countless entrepreneurs confidently navigate complex financial decisions, from scaling operations to achieving successful exits. Connect with Natalie on LinkedIn for more expert advice on business finance, or explore Finance Fight Club’s resources at financefightclub.com to transform your financial future.