Begin with the obligations you cannot avoid
A cash reserve is there to protect operations when collections slow, a repair arrives or an unexpected opportunity needs a quick decision. Start by totaling essential monthly costs: payroll, occupancy, debt service, insurance and the minimum cost to deliver your work.
Separate operating cash from money already committed to payroll taxes, sales taxes or other liabilities. A bank balance can look reassuring while part of it is already spoken for.
Make the target fit your business
A stable monthly retainer business may need a different cushion than a seasonal contractor or a product company carrying inventory. Consider customer concentration, collection timelines, seasonality, access to credit and how quickly you could reduce discretionary spending.
Rather than chase a universal number of months, model a few scenarios: what if a major customer pays late, sales fall for a quarter, or a key piece of equipment fails? The forecast reveals which risks matter most.
Fund it deliberately
Choose a target range and a repeatable contribution, such as moving a set amount or a portion of monthly surplus into a dedicated reserve account. Revisit the target when payroll, debt or sales patterns change.
A reserve is not a substitute for cash-flow planning. Pair it with a rolling forecast so you can see a shortfall coming while there is still time to respond.
This article is general educational information, not personalized tax, legal, investment or financial advice. Your circumstances may differ; consult an appropriately qualified professional about your situation.