How Much Cash Should a Business Keep on Hand?
One of the most common financial questions business owners face is: How much cash should I keep in reserve? The answer depends on the size, complexity, and stability of your business—but for most companies, holding the right amount of cash is essential to navigating uncertainty, seizing opportunities, and staying in control of your business’s future.
A Good Rule of Thumb for Small Businesses
For smaller businesses—especially owner-operated firms without dedicated financial staff—a simple rule of thumb can go a long way. A widely accepted guideline is to maintain 3 to 6 months of operating expenses in cash reserves. That means if your business typically spends $100,000 per month on payroll, rent, inventory, and other recurring costs, you should aim for $300,000 to $600,000 in the bank.
This reserve acts as a buffer against:
Unexpected slowdowns in revenue
Delayed customer payments
Emergency repairs or equipment failures
Short-term investment opportunities (e.g., bulk inventory discounts or seasonal hiring needs)
It’s important to adjust this baseline based on the seasonality and volatility of your business. If your revenue is highly cyclical or project-based, leaning closer to 6 months—or even 9 months—of reserves might make more sense. On the other hand, a subscription-based or recurring revenue business with stable margins might comfortably hold closer to 3 months of expenses.
Cash Reserve Guidelines Based on Fixed Costs
Another way to approach reserves is to look at your monthly fixed costs, excluding variable inputs like inventory or raw materials. In this model, you’d keep 6 to 12 months of fixed expenses—such as payroll, rent, insurance, software subscriptions, and loan payments—on hand. This ensures that, even if revenue dips, you have breathing room to cover your base operations while you adapt.
This approach is particularly useful for service-based businesses or firms with long lead times between customer acquisition and payment.
When Simple Rules Aren’t Enough
While these guidelines are helpful starting points, they don’t account for nuances like:
Access to credit or working capital lines
Supplier payment terms and customer payment cycles
Capital expenditure plans
Growth trajectory and reinvestment needs
That’s where a more customized approach becomes essential.
For Larger and More Sophisticated Businesses: Build a Strategic Cash Management Plan
Once your business reaches a certain level of complexity—whether in terms of revenue size, number of employees, or pace of growth—it's time to move beyond basic rules of thumb. At this stage, working with a fractional or full-time CFO becomes invaluable.
A CFO can help you:
Forecast your cash flows in detail, identifying high and low liquidity periods
Determine optimal reserve levels based on business risk, revenue concentration, and capital strategy
Segment your cash into operational reserves, emergency reserves, and strategic opportunity funds
Balance cash reserves against growth investment needs, ensuring you're not overcapitalized in cash when that money could be driving returns elsewhere
Custom modeling allows for more nuanced decisions, like adjusting reserve levels during a fundraising cycle, a product launch, or a potential acquisition.
Bottom Line
For smaller businesses, sticking with 3–6 months of expenses (or 6–12 months of fixed costs) is a good place to start. It gives you a safety net without tying up too much working capital. But as your business grows, so do the stakes. That’s when it pays to build a cash management strategy that’s tailored to your operations, your goals, and your industry risks.
Whether you’re flying solo or have a full finance team, the right reserve strategy can be the difference between reacting to problems and confidently navigating the road ahead.