How Much Cash Should a Small Business Keep in Reserve?

As a small business owner, you know you need enough money in your business account to pay your employees and vendors, invest where needed, and keep the lights on during lean times. 

But how much money should you keep in your different business bank accounts? Too much can mean missed opportunities, while too little cash flow could leave you unable to pay bills and even lead to business failure.

In this article, we’ll explore the types of business bank accounts your business should have and strategies for determining how much cash you should keep in each so you can make smart decisions with your money. But, first, let's answer the burning question:

How Much Should a Business Owner Save?

Ideally, your business should save at least 10% of your monthly profits or three to six months of expenses to keep you in good financial standing. Generally speaking, you should aim to have enough cash or liquid assets on hand to cover several months’ worth of expenses in the event of an emergency. This way, you can avoid taking on too much debt and keep their operations running smoothly.

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Want to nail down that number? Let's dive into how to do that.

How to Decide How Much Money to Keep in Your Business Accounts

When deciding how much money to keep in your business accounts, there is no one-size-fits-all answer. The right amount of cash for your business depends on several factors, such as your industry, the size of your business, your current financial situation, and your future plans. That said, here are five steps you can take to determine how much is enough cash for your business.

Step 1: Start by Figuring Out Your Average Monthly Expenses

The first step in deciding how much cash to keep in your business account is understanding your average monthly business expenses, including payroll, rent, supplies, marketing costs, and other regular bills. 

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If you use accounting software like QuickBooks, FreshBooks, or Xero, this should be easy. Simply look at your most recent annual profit and loss statement and divide each expense by 12.

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If you don’t use accounting software, gather your bank statements or other expense reports for the past 12 months, add up the amount spent, and divide by 12. This will give you an average of how much you spend each month.

Step 2: Put Aside Enough Cash to Cover Your Costs for at Least Three Months

Most business experts recommend holding onto at least three to six months of expenses. Having this much cash helps ensure that you can continue to pay your employees, vendors, and suppliers, and cover other expenses even if you have a temporary lull in sales or a delay in collecting receivables.

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Once you know your average monthly operating expenses, multiply that figure by three to get an idea of how much money you need in your business accounts.

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If that number seems impossibly high, don’t panic. Any savings is better than none, so simply start setting aside a small amount of every customer payment you collect. 

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But keep in mind that you may want to adjust that three-month rule-of-thumb up or down depending on your business needs. For example, if your business is seasonal or particularly sensitive to economic downturns, you may want to aim for nine or even 12 months of expenses in the bank. If you’re a startup that will take longer to become profitable, you may need an even larger cushion.

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On the other hand, if you have access to a line of credit or could quickly and easily get a bank loan, you may feel comfortable keeping just a couple months’ worth of expenses in your bank accounts.

Step 3: Keep the Remaining Amount in a Business Savings Account

Maintaining a separate business emergency fund is an excellent way to separate your savings from your day-to-day operating funds. When all of your cash is in one account, it’s too easy to overspend or dip into your savings for unnecessary expenditures.

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If possible, open up your savings account at the same bank that handles your checking account. This makes it easy to keep your funds separate while still allowing for easy transfers between accounts when needed.

Step 4: Use the Money in Your Savings to Cover Unexpected Costs or Growth Opportunities

Now that you have business cash reserves, it’s important to set clear goals for how you’ll use the money. For example, you may decide to use the funds in your savings account for unexpected costs, such as a broken laptop or an emergency business vehicle repair. You could also choose to use the money to invest in growth opportunities, such as hiring additional staff, advertising your services, expanding into new markets, or purchasing inventory at a very low cost.

When you’re clear about how you want to use the money, you’re less likely to tap into your savings for unnecessary expenses.

Step 5: Revisit Your Budget and Expenses Regularly to Stay on Track

As your business grows and changes, your cash flow needs may change as well, so regularly revisit your budget and expenses to ensure you have enough money on hand. 

With these five steps, you can ensure you can cover any unexpected expenses and take advantage of any opportunities that come your way. 

Why Should I Keep Money in My Business Account?

Having separate accounts for your business is an important step in maintaining financial responsibility and organization. By keeping your business funds separate from your personal accounts, you can easily track cash inflows and outflows. 

This makes tax time a lot easier because you’re not digging through bank statements trying to figure out which transactions are business-related and which as personal. Here are the top three accounts you should consider opening for your business:

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• ‍Checking: The most basic type of account for a small business is a checking account. Checking accounts are an ideal platform for your daily operations, such as paying employees and vendors. Some checking accounts also offer features such as free online banking, automatic payments, and recurring deposits.‍
• Savings: An account that helps you set aside cash reserve funds for taxes, future expenses, or investments. Money in a savings account earns interest over time. ‍
• Money market account: A type of savings account that lets you pay bills, withdraw money and write checks. They typically offer higher interest rates than traditional accounts while keeping your money easily accessible. 

Benefits of Business Bank Accounts

Opening one or more business accounts can offer several benefits, such as:

Financial Responsibility and Organization

Maintaining a separate business checking account allows you to easily track income and expenses and identify where you’re spending your money.

If your business is structured as a limited liability company (LLC) or corporation, you’re actually legally required to maintain a bank account for your business that’s separate from your personal account. If you operate as a sole proprietorship or partnership, separate accounts aren’t required, but they’re still a good idea.

Legitimacy

Having a separate account for your business can be incredibly beneficial in terms of looking more professional and legitimate. It can give customers, vendors, suppliers, and anyone else doing business with you more confidence in your financial stability and health. 

Earning Interest

Business savings accounts, money market accounts, and even some business checking accounts pay interest on the money you keep in your account. That interest may not seem like a lot of money at first, but over time it provides a little boost to your business finances.

FDIC Protection

As long as your money is at an FDIC-insured bank, up to $250,000 of it is protected. The Federal Deposit Insurance Corporation is an independent government agency that provides deposit insurance to banks and other financial institutions in the United States. So if the bank fails, FDIC insurance protects your money by insuring up to $250,000 per depositor.

This can give you some peace of mind that your money is safe in the bank.

Financial Cushion

Keeping some cash in your business accounts provides a financial cushion in case of a rainy day. When unexpected costs or drops in sales arise, having cash on hand helps to ensure that you can still pay employees, vendors, and suppliers. It can also allow you to take advantage of potential opportunities that may come up without having to wait for other funding sources.

How Much Money Does the Average Small Business Have in the Bank?

The median small business holds an average daily cash balance of $12,100. However, the average varies widely across different industries. Here are the average cash balances for businesses in different sectors:

• High-tech manufacturing: $34,200
• Wholesalers: $18,500
• Construction: $10,700
• Personal services: $5,300

Factors to Keep in Mind When Choosing the Right Bank for Your Small Business

When choosing a financial institution for your business accounts, there are many factors to consider. The following are some important considerations when selecting the right bank for your business accounts.

Range of Products and Services

The first factor to consider is the type of financial services the bank offers. Banks typically offer a range of products and services, including checking accounts, savings accounts, credit cards, loans, and more. Make sure you choose a bank that offers the type of services your business requires.

Fees

The second factor to consider is the fees and charges associated with banking services. Many banks charge monthly fees, transaction fees, and other costs for their services. Make sure the bank you choose does not have excessive or hidden fees that could add up over time.

Customer Service

The third factor to consider is customer service. Whenever possible, look for a financial institution with knowledgeable and helpful staff who can answer your questions quickly and accurately. This will make it easier for you to manage your business accounts.

Interest Rates

It’s also important to be aware of the interest rates your bank pays on your checking, savings, and money market accounts. This can help you make the most out of the money you have saved.

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Interest rates on savings accounts fluctuate all the time, but as of February 2023, the average annual percentage yield on business savings accounts is 2.25%. That might not seem like much but remember, the purpose of keeping money in your business savings account isn’t to earn interest—it’s to have easily accessible cash to cover unexpected expenses or take advantage of opportunities.

Features

Finally, look for a bank that offers convenient features, such as online banking, a user-friendly mobile app, mobile deposits, and bill paying. These incentives can be extremely helpful when managing a busy business.

Make Sure Your Money Is Working for You

No matter how much you keep in your business accounts, the most important thing is that you are proactive about monitoring your spending and keeping an eye on future plans so you can make informed decisions about your finances. 

What works for one business owner might not work for another, so it’s essential to find what system works best for you and your business. 

Talk to your accountant or financial advisor to better understand what is right for you and your business. In the meantime, remember that it is always better to have too much money saved up than not enough!