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Thread: Cash Reserves

  1. #1
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    Default Cash Reserves

    I am curious how much cash reserve I should have in my business. I have read that 3 to 6 months worth of monthly expenses is a good rule of thumb but I am curious if this includes variable COGS expenses. I assume the number one reason for cash reserves is to prepare for a major slump in sales. But when sales slow down so too would material costs and since they're on net 30 and since I am quite aggressive with my receivables (average is 5 days), should these variable costs really be included in the reserves?

  2. #2
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    It depends. If you're comfortable with a low reserve than keep a low reserve. If you have overdraft you can run a lower reserve. I run a higher reserve than I should due to not having overdraft/credit line/credit cards for the business (for some reason the bank thinks I'm high risk, captive client).

    I'm the opposite of you when it comes to A/R and A/P. I pay all my bills as they arrive while my receivables are in the 30-45 day range.
    Brad Miedema
    Fulcrum Saw & Tool

  3. #3
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    A good rule for your personal cash reserves is 3-6 months of monthly personal expenses to smooth out the slow periods.

    For your business, it'll depend on the business and your cash flow. I tend to keep about 2 payrolls in the bank, because that's 2 months and we'd better be billing at least that much on average every 2 months before I would end up shutting down taking money out of the business. But an inventory-driven business has different cash needs and decisions that need to be made about dead inventory. You also need to take into account the business' overhead to keep the lights on and the doors open.

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