Business cash reserves: How much to keep

When you’re running a small business, you quickly learn how crucial managing cash flow can be to your long-term success. 

Building cash reserves is also essential for sustaining and growing your business. Having cash reserves allows you to invest in new opportunities while also helping you prepare for any unexpected challenges facing your company. But how much cash reserves should a business have on hand? And how do you know what’s right for your company? Keep reading to learn more about building cash reserves for your business. 

What you’ll learn:

• Establishing a cash reserve account can help ensure your business can cover emergencies and continue to grow.

• Experts recommend saving at least three to six months’ worth of business expenses.

• Having too much in your cash reserves can lead to missed growth opportunities, so it’s important to understand how much you should save and how much you should reinvest in your business.

• You can help increase your cash reserves by creating a savings goal and setting aside a predetermined amount of money on a monthly or quarterly basis.

A cash reserve account holds money that’s easily accessible at a moment’s notice. It can be used for emergencies—for instance, to replace a piece of essential equipment that suddenly breaks down. Or you might consider saving it for a future investment that can help grow your business. 

Having a robust business cash reserve account can also help you avoid opening a new line of credit—with potentially high interest rates—should your company be hit with an unexpected expense. 

Financial experts recommend that businesses save at least three to six months of expenses. When deciding how much to save for your business, review your financial statements to get a better idea of how much cash you could need. Carefully examine your cash flow, business expenses and profits to gauge just how many months you might need to cover.

When deciding how much cash reserves your business needs, ask yourself the following questions:

• How much cash do you need to cover monthly expenses?
• How much cash do you need to cover upcoming, known expenses?
• How much cash do you need to continue to support business growth?

Your business plan could be another good starting point. It should include financial projections based on historical data that demonstrate how your revenue, expenses, profits and cash flow may change over time. And if you’re a newer business, you can estimate your cash reserve amount by using your projected cash flow and budget. 

Keep in mind your cash reserves should be easy to access quickly. Consider starting a business savings account to keep the funds separate from other cash you use regularly.

Cash reserves can be beneficial to businesses for several reasons. Here are a few. 

Equipment can break. Weather can damage buildings and property. The price for a vital part can increase without warning. Vendors may go out of business, leaving you no choice but to choose one that may charge more. Business can be unpredictable, but your cash reserves can help cover these types of unexpected events to help you stay on track. 

As a business owner, you’re always thinking about ways to grow. Maybe you have the chance to partner with a new brand or hire a new employee who perfectly aligns with your company’s mission. Should a great opportunity arise, having cash reserves helps ensure you won’t lose out on the investment. 

Every business faces the possibility of having a month where the sales just aren’t coming in. Whether it’s due to the economy, the time of year or any other unexpected slowdown, when sales dip, you might be left wondering how you’ll cover your normal operating expenses. Cash reserves can come in handy during these slower months when your profits decline.

Conversely, holding too much cash reserves could mean your business is missing out on potential investments that could help it grow. While cash reserves can help cover disruptions in cash flow, it’s also important to invest some of that cash in your business to help generate revenue and spur growth.

Boosting cash reserves for your business can be accomplished by:

• Identifying what changes can be made to reduce costs and help increase savings
• Consistently setting aside cash monthly or quarterly 
• Creating a budget and sticking to it

As an alternative to cash reserves, your company could consider using an SBA loan or a business credit card to cover unexpected expenses.

Backed by the U.S. Small Business Administration, SBA loans are available to help business owners cover a variety of expenses. They come with benefits like lower down payments, competitive rates and extended repayment terms.

Business credit cards can help you cover emergency costs while also allowing you to manage and track business expenses and monitor employee spending. Plus, some types of business credit cards may allow you to earn rewards on purchases, like points or bonus miles.

Building cash reserves can help your business cover emergencies, navigate slower months and invest in growth opportunities. Experts recommend saving at least three to six months’ worth of cash to cover your company’s expenses.

Business credit cards can also be an option to cover unexpected costs while providing you with a source of financial flexibility. Compare business cards from Capital One today to find an option that’s right for your company. You can even see if you’re pre-approved with no impact on your personal credit scores.