How much cash should your company keep in reserve?

A cash reserve is the money that lets you pay your bills when a customer pays late, a contract ends or a quiet month runs longer than planned. Without one, every delay becomes a problem.

A sensible starting point is three months of fixed costs: rent, salaries, software, loan repayments and anything else you pay whether or not you make a sale. Add up one month of these and multiply by three.

Keep tax out of it. Money you’ll owe the tax office isn’t part of your reserve, even while it sits in your account. The simplest fix is a separate account for tax, topped up every time you’re paid.

Build the reserve gradually. Setting aside a fixed share of every payment, even five or ten per cent, gets you there faster than waiting for a month with money to spare.

Review the figure twice a year. If you’ve hired, signed a longer lease or taken on a bigger contract, your fixed costs have changed, and your reserve should change with them.