Building a Cash Cushion for Your Business
How big your reserve should be, where to keep it, and a simple allocation habit that builds it without a windfall.
A broken delivery van. A big client who pays 60 days late. A slow month that turns into a slow quarter. Every business hits these. The ones with a cash cushion make a few phone calls; the ones without one make expensive decisions in a hurry.
Research from the JPMorgan Chase Institute found the median small business held only about 27 days of cash buffer. Even a modest reserve puts you ahead of many of your peers.
How big should it be?
A common guideline is three to six months of operating expenses: rent, payroll, insurance, loan payments, software, and the other bills you pay whether or not sales come in. Treat that range as a starting point, not a rule.
| Your situation | Consider aiming for |
|---|---|
| Steady recurring revenue, low fixed costs | Lower end, around 3 months |
| Seasonal or project-based revenue | Enough to cover your slowest stretch, often 6 months or more |
| One or two customers make up most sales | Higher end |
| Heavy equipment or vehicle dependence | Add a repair and replacement fund |
Do the math
If your monthly operating expenses are $22,000, three months is $66,000 and six months is $132,000. That can feel out of reach. Start with a first milestone of one month, then build from there.
Try it
Cash Flow Forecast
See how many months your current cash would last, then try different reserve targets.
Lowest point
$1,711
in Mar
Cash in 12 months
$81,948
Average monthly net
$4,329
Starts from Jan. Simplified model: sales follow the seasonal pattern you pick, variable costs scale with sales, fixed costs stay flat, and taxes are not included.
Where to keep it
- Separate from operating cash. A distinct savings or money market account at your bank keeps it visible but out of daily spending.
- Insured. FDIC deposit insurance generally covers up to $250,000 per depositor, per insured bank, per ownership category. Credit unions have similar NCUA coverage.
- Reachable within a day or two. Avoid investments that can drop in value or lock up your money when you need it.
- Earning something. Business savings, money market accounts, and short-term Treasury bills can pay interest without much risk; compare rates and access rules.
Build it with an allocation habit
Waiting for leftover money at the end of the month rarely works, because expenses tend to grow to fill whatever is in the account. A different approach, popularized in several small-business books, flips the order: when money comes in, you first move fixed percentages into separate accounts for profit, owner pay, and taxes, and run the business on what remains.
Set up a simple allocation system
- 1
Open separate accounts
At minimum: operating, tax set-aside, and reserve. Some owners add one for owner pay.
- 2
Pick starting percentages
Choose something small enough to stick with, such as 3% to 5% into reserve, plus your estimated tax rate into the tax account.
- 3
Transfer on a schedule
Move the money once or twice a month, on the same days, based on deposits received.
- 4
Raise the percentage quarterly
Each quarter, nudge the reserve share up by a point if operations can handle it.
- 5
Write down the rules for using it
Decide in advance what counts as an emergency and how you will refill it afterward.
Owner story
Grace started moving 3% of every deposit into a separate reserve account at a different bank, so she would not see it every day. Within 18 months she had about two months of expenses saved. When her main lift failed and needed a costly repair, she paid cash and kept the shop open, instead of putting it on a high-rate card.
Illustrative composite, not a real customer.
Myth or fact? Tap to flip
Quick check
Your monthly operating expenses are $15,000. Using the common three-to-six-month guideline, what range might you target?
Words to know
- Operating expenses
- The ongoing costs of running the business, such as rent, payroll, and insurance.
- Cash reserve
- Money set aside for emergencies and slow periods, kept separate from daily operating funds.
- FDIC insurance
- Federal protection for deposits at insured banks if the bank fails, up to legal limits.
Finished reading?
Track your progress through Stage 2: Manage.
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