​Why Keep a Cash Reserve

​Why Keep a Cash Reserve

Posted by Emma on 21st Apr 2024

The COVID-19 pandemic underscored the importance of maintaining a cash reserve for unexpected situations. A robust cash reserve provides flexibility, allowing your business to seamlessly navigate delays in customer payments or interruptions in your order pipeline. Additionally, it ensures you can meet payroll obligations and avoid the risks associated with trading insolvently.

Optimal Size of a Cash Reserve

The consensus among financial experts is to maintain the equivalent of three months of working capital in an easily accessible account. Working capital typically includes current assets like inventory and receivables minus any short-term liabilities such as payable accounts.

Alternatively, consider calculating the amount you would need to cover all three-month operational costs without any incoming revenue. This approach simplifies planning and prepares your business for sudden financial halts.

Individual Financial Preparedness

It is also prudent for individuals to hold a personal cash buffer equivalent to three months' salary in their accounts. This personal reserve helps bridge financial gaps during unexpected income disruptions until other safety nets like income protection insurance become available.

Strategies for Building a Business Cash Reserve

Opening a separate deposit account for your business can be beneficial. Services like the Goals feature of a Starling business account facilitate targeted savings for different operational needs, including:

  • General working capital
  • Corporation tax and estimated taxes on current year profits
  • VAT obligations, if applicable
  • Funds for future projects or unforeseen expenses
  • Allocation of excess profits for dividends or pension enhancements

You might also consider allocating funds for personal tax liabilities within their corporate accounts, which can be distributed as dividends when tax payments are due.

The primary goal of maintaining a cash reserve is ensuring your business can always respond proactively to financial challenges.

Do you have strategies for managing your business's cash reserves, or insights on how to improve financial stability?