How much money should your business keep in reserve? A healthy cash reserve amount can help with financial emergencies, additional growth, and more.
The old saying “cash is king” is never truer than when your business faces financial hardship. A proper cash reserve can cover financial emergencies and ensure that your business remains running—without customers and employees ever noticing. It can also be a handy tool for navigating seasonal and other more expected revenue fluctuations.
But if cash is helpful in the bank, it’s an even better accelerant for helping your company grow. The key is to find a balance between saving enough cash to keep your business from derailing when you need the money and hoarding too much cash that could otherwise be put to work.
Determine the right amount of cash reserves and maintain the reserve in a highly liquid account—and your company will be prepared to weather hardships, while still sustaining growth.
How Much Cash is Enough for a Reserve?
In the realm of personal finance, advisors often recommend that individuals have three to six months of expenses saved in an emergency fund. For companies, the guidelines are similar—most businesses store between three and six months of expenses within a cash reserve.
However, the exact amount varies significantly by industry and business stage. As you anticipate your cash flow for the future, consider whether you’ll be ramping up your hiring, making a big purchase or even downsizing. Each will affect your anticipated expenses and impact how much cash you should have in reserve.
Factor in where your funding will be coming from and your company’s ability to save cash as you pay for operations. For instance, if you’re relying on a bank loan to fund your expenses, then saving may be difficult or not advised, given you need to pay back the amount borrowed plus interest.
Where to Store Your Cash
Once you’ve established the right amount of a cash reserve and begin saving, you’ll want to ensure you’re keeping the cash in an appropriate place. The purpose of a cash reserve is to provide easily accessible funds, in the event of a sudden expense or revenue dip. To that end, make use of highly liquid, short-term saving and investment accounts.
For example, a commercial bank account provides a secure, liquid way to house your reserve cash. You can earn a small amount of interest on the money saved, and there are usually no restrictions to accessing it.
Money market funds and Treasury Bills provide other alternatives. Both may give your company a modest return on your investment while allowing you to liquidate your funds within a matter of days. However, do be aware that money market funds may have required deposit minimums and/or limits to how many transactions you can make within specific time periods.
Do I Have Too Much Cash or Not Enough?
If your company is in the process of establishing a cash reserve, a business line of credit can serve as a good interim source of potential funds. Different than a bank loan, lines of credit are more flexible and not tied to a specific purchase or activity. Establishing one can provide a backstop while you’re building up your cash reserve and supplement your cash once you have it.
Alternately, if you have more cash than you need—that’s a good problem. But you should find ways to put it to work and not simply hoard it within your reserve. Consider exploring capital improvements that you’ve perhaps put off, establishing employee retirement accounts, or paying down any high-interest debt.
Managing cash flow is an integral part of every business. Establishing a cash reserve provides a safety net for when you need cash to get through an unexpected period or to simply sustain your organization through seasonal cash crunches. Set up one now and you'll be prepared for whatever the future brings.