According to experts, setting aside 3-6 months’ worth of expenses is a good rule of thumb. But the right answer will vary depending on several factors, like your:
- Business stage and access to funding
- Goals and long-term growth plan
- Inventory and/or services or products provided
- Industry environment
- Location and real estate
- Number of staff and other operating expenses
For example, a lean remote tech startup with a small team can often get by with a smaller cash reserve than a large retail business with multiple locations and a sizable staff.
Also, consider the economy. During a recession or market downtown, having more cash on hand helps pay workers, keeps the office lights on, and prevents you from relying on emergency funding at high interest rates.
Fun fact: it’s not always better to have a lot of cash on hand. Big cash reserves don’t actively contribute to business growth and leaving money lying stagnant may cause you to miss out on growth opportunities. Plus, investors like to see growing balance sheets, not flat lines.
If you plan on tucking more than 6-12 months’ worth of expenses away, consider how that money can be used to better support the company long-term. Source
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