How much cash should a small business keep in reserve?

The usual answer is three to six months of fixed costs. That is a reasonable starting point, but it is a rule of thumb, not a target. The right number for your business depends on how lumpy your income is, how quickly your customers pay, and which big bills are coming in the next year.
Here is how to work out a reserve figure that fits your business rather than someone else's.

Why the "three to six months" rule is only a starting point

The rule exists because most businesses fail through running out of cash, not through lack of profit. A reserve buys you time: time to replace a lost customer, chase a bad debt, or ride out a quiet quarter without making panicked decisions.
But two businesses with the same overheads can need very different reserves:
  • A subscription business with monthly direct debits and hundreds of small customers has predictable income. Three months may be plenty.
  • A project business that invoices in large stages, with two or three customers making up most of the turnover, can see income swing hard from month to month. Six months or more is sensible.

Step 1: Work out your monthly "must pay" costs

Start with the costs you would still have to pay if sales stopped for a while:
  • Salaries, including employer National Insurance and pension contributions
  • Rent, rates and utilities
  • Loan and finance repayments
  • Software, insurance and other fixed contracts
  • Your own minimum drawings or salary as a director

Leave out costs that fall away when sales fall, such as materials or subcontractors on specific jobs. This gives you a monthly fixed cost figure. Your monthly management accounts are the best place to find it; if you are not sure how to read them, our guide on how to read management accounts walks through it.

Step 2: Set aside tax separately, not as part of the reserve

This is where many owner-managers come unstuck. Money you owe HMRC is not a reserve. It belongs in its own pot, ideally a separate savings account you move money into each month.
The main dates to plan around, as set out on GOV.UK:
  • VAT: for most businesses, the return and payment are usually due one calendar month and seven days after the end of each VAT period (GOV.UK: Sending a VAT Return).
  • PAYE: employers paying monthly must pay HMRC by the 22nd of the next tax month if paying electronically (GOV.UK: Pay employers' PAYE).
  • Corporation Tax: you must pay 9 months and 1 day after the end of your accounting period (GOV.UK: Pay your Corporation Tax bill). This is the one that most often catches companies out, because it falls long after the profit was made and the cash may already have been spent.
A simple habit: each month, move the VAT you collected and an estimate of the Corporation Tax on that month's profit into the tax pot. Then the bank balance you see is closer to the money that is really yours.

Step 3: Adjust for your risks

Take your monthly fixed costs and multiply by a number of months that reflects your risk. Move towards the higher end if:
  • One or two customers make up a large share of sales
  • Customers routinely pay late, or you offer long payment terms
  • Sales are seasonal and you have a known quiet period
  • You hold stock or pay suppliers up front before you get paid
  • You have a big one-off cost coming, such as equipment, a lease renewal or a new hire
Move towards the lower end if income is recurring and spread across many customers, and you have an agreed, unused overdraft or facility you could draw on. A facility is not cash, though, and banks can reduce or withdraw it when you most need it, so do not treat it as a full substitute.

Step 4: Check it against a cash flow forecast

A reserve figure on its own tells you how big the cushion should be. A cash flow forecast tells you when you will need it. Put your expected income, fixed costs, tax payments and one-off items into a rolling 13-week or 12-month forecast and look for the lowest point. If your bank balance at that low point dips below your reserve, you have a decision to make now, not when it happens.

Our cash flow forecasting guide shows how to build one step by step.

What to do if you are nowhere near your target

Most growing businesses do not have six months of costs sitting in the bank, and that is normal. Build towards it:
  1. Set the tax pot up first. That alone removes the biggest shocks.
  2. Pick a realistic first milestone, such as one month of fixed costs.
  3. Transfer a fixed amount or percentage of receipts into a reserve account each month, so it happens without a decision.
  4. Speed up cash coming in: invoice promptly, chase on day one of being overdue, and offer easy ways to pay.

When to get help

If you are growing quickly, raising investment, or keep finding that the business is profitable on paper but short of cash, it is worth having someone look at the numbers with you every month. That is exactly what our outsourced finance function does: monthly management accounts, a rolling cash flow forecast and a finance director's view of how much cash you really need. Get in touch to talk it through.

Last reviewed October 2026. This article is general information, not advice for your circumstances. Speak to an accountant before making decisions.

Joe Gilbert ACMA CGMA