View your company’s cash reserve as you would your personal savings. Aim to have at least three to six months of your company’s expenses liquid, and perhaps more if you’re foreseeing heavy future costs. This coupled with your emergency 5-10 percent contingency fund for unexpected costs should suffice should a serious issue arise. It’s best to try to have this amount on hand as quickly as possible, but be realistic in how much you can put away each month after expenses are paid.
How to get started with cash reserves
You can begin with setting a goal of six months to a year, but it’s okay if it takes a while longer, and if you experience a period of lean months, then you may have to cut back a bit, but begin to sock away cash more aggressively once things stabilize. Having this liquidity in your business will help during times of hardship, for example, if you can’t make payroll one month or need to repair a water leak at the office.
And by getting into the habit of having a sufficient amount of resources on hand, YOU determine what projects your company can take on or how quickly you can fix a repair rather than having it solely dictated by the amount of cash you have.