Company cash reserves: how much to hold — Guides

2 min read

3–6 monthsCommon cost-cover rule of thumb

DependsSteadier income, thinner buffer

Not idleBalance safety vs return

Why a reserve matters

A cash reserve is what carries a company through the gap between a shock and a recovery — a lost customer, a late payer, a quiet quarter. Businesses rarely fail because they're unprofitable overnight; they fail because they run out of cash at the wrong moment. A buffer buys time to react calmly instead of scrambling. It's the difference between a setback and a crisis.

The rule of thumb, and its limits

A common guide is to hold three to six months of fixed operating costs in reserve. It's a useful starting point, but only that. A business with steady, contracted income can run leaner; one with lumpy or seasonal revenue needs more. Base the figure on your cost base and income volatility, not a generic number. See managing seasonal cash flow if your income swings.

What drives the right number

Three things set your target: how predictable your income is, how quickly you could cut costs if trade fell, and how fast you could raise cash if needed. A company with a standing facility it can draw on needs a smaller idle buffer, because funding is a phone call away. That's the quiet value of an arranged facility — it lets you hold less dead cash. Forecast the picture with cash flow forecasting.

The cost of hoarding

There's a real cost to over-reserving. Cash sitting idle earns little and isn't funding growth, stock or the opportunities that build the business. Beyond a sensible buffer, extra cash is often better invested in the company — or, for owners, extracted efficiently. The goal is enough to be safe, not so much that the balance sheet is lazy. See how directors extract profit.

Reserve plus facility beats reserve alone

The smartest position pairs a modest cash reserve with an arranged facility you can draw on if the buffer runs low — safety without tying up dead money. Credicorp lends to the company with no personal guarantee, giving you standby working capital that lets you run leaner day to day. Size the combination with the working capital calculator.

Frequently asked questions

How much cash should my company keep in reserve?

A common rule of thumb is three to six months of fixed operating costs, but the right figure depends on how steady your income is, how fast you could cut costs, and how quickly you could raise more cash. Steadier businesses can hold less; volatile ones need more.

Can a company hold too much cash?

Yes. Cash sitting idle earns little and isn't building the business. Beyond a sensible buffer, surplus cash is usually better invested in growth or extracted efficiently. The aim is enough to be resilient, not so much the balance sheet is lazy.

Does having a loan facility reduce the reserve I need?

It can. An arranged facility you can draw on quickly acts as a backstop, letting you hold a smaller idle cash buffer. Pairing a modest reserve with standby funding is often more efficient than hoarding cash alone.