How much should your business have in savings?

Every business faces unexpected costs, from a sudden dip in sales to a major equipment breakdown. Having a healthy cash reserve can be the difference between riding out a rough patch and facing serious financial trouble. 

This guide explains how much your business should keep in savings and why a cash reserve is essential.

How much should your business save?

As a rule, your business should have three to six months’ worth of working capital in savings to cover unexpected expenses or a period of slow sales.

To help you calculate your savings goal, follow the steps below:

1. Analyse your financial statements

Review your financial statements from the past six to 12 months and list your regular outgoings, such as rent, salaries, utilities, insurance, and subscriptions. While some costs, like rent and salaries, are generally consistent, others, such as utilities or certain subscriptions, can fluctuate. For a clearer picture, calculate the average monthly cost of any variable expenses.

2. Consider how much cover you require

Many small businesses aim for a cash reserve of three to six months’ worth of expenses, but seasonal or riskier businesses might want to aim for six to 12 months’ worth.  

3. Multiply to work out your savings goal

To calculate your savings goal, multiply your average monthly expenses by the number of months you’ve chosen. 

4. Be prepared to adjust your goal over time

Once you have a plan in place, it’s important not to forget about it. You might need to adjust it to factor in forthcoming growth plans, such as hiring staff or buying more equipment, for example.

How to build up cash reserves for your business

There are plenty of steps you can take to help build your business cash reserves. For example:

• Open a dedicated business savings account – This ensures your personal and business finances are kept separate and you won’t accidentally spend money you should be saving

• Start with a realistic target – It’s best to start small, so break your savings goal into achievable milestones

• Use automatic transfers – Many business accounts include tools to help you automatically set aside cash on a regular basis, so you don’t need to remember to do it

• Control spending – It’s sensible to regularly review your expenses and cut non-essential spending so you can save more. Negotiate with suppliers for better deals or get rid of subscriptions you no longer need

• Stash away extra cash when you can – If your profits suddenly increase, be sure to allocate a portion to your savings

• Rebuild where necessary – If you need to spend your cash reserve, make sure you have a plan for rebuilding it as soon as possible

Why does a business cash reserve matter?

A cash reserve acts as a vital safety net for your business, helping you stay afloat when sales dip, clients pay late or you face unexpected costs, such as equipment failures or legal expenses. A cash reserve can help your company keep trading through tough periods, including economic downturns, while continuing to pay suppliers, rent and other essential expenses. 

Without this financial cushion, even a profitable business could quickly run into cash flow problems, putting its survival at risk.

Read more...

• What are business savings accounts?

• How to save money for your business

• How to manage cash flow effectively