Working Capital
How Much Cash Reserve Should a Small Service Business Hold?
Short answer
Hold 3 months of fixed operating costs as a minimum, 6 months ideal. Calculate by adding rent, insurance, payroll, debt service, and your own minimum draw. Keep it in a high-yield savings account separate from operating, and rebuild it any time it dips.
Cash reserve is what lets you say no to bad work, weather a slow month, and seize an opportunity when it appears. Most owners under-reserve until the first crisis teaches them.
Calculation
- Add up your monthly fixed costs: rent, insurance, software, debt service, payroll, owner minimum draw.
- Multiply by 3 (minimum) and 6 (target).
- Compare to current operating cash. The gap is your build target.
How to build it
- Transfer 5% of every customer payment into reserve until target hit
- After tax savings — reserve is your second untouchable account
- Replenish immediately after any draw
- Keep in a HYSA earning 4%+ — at $30k reserve that is $1,200/year of free money
Frequently asked questions
Can I use my line of credit instead of cash reserve?
LOCs can be reduced or pulled by the bank when you need them most. Reserve is real cash. Use both, but never substitute one for the other.
Cash flow you can see.
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Sources & further reading
Primary sources we consulted when writing and reviewing this guide.