A business cash reserve covers operating costs when income stops. Size it against your true monthly run rate, hold it somewhere liquid and separate from the trading account, and build it by moving a fixed percentage of receipts across every month. The number matters less than whether anyone is watching it.
How much cash reserve a business needs
Three to six months of operating expenses is the number most advisers quote, and it is a reasonable default. Take your monthly operating cost base, multiply by the number of months you would need to either fix the problem or wind down in an orderly way, and that is your target. A business with long contracts and predictable receipts can sit at the lower end. One with lumpy revenue, a single dominant customer, or a seasonal shape needs the higher end.
For a venture-backed Australian startup the same question usually gets asked as runway, in months, and the answer is set by the round rather than by a savings habit. It is still the same calculation. What changes is that the buffer is finite and visible to a board, which is why almost every conversation I have with a founder or a CFO includes the same challenge: cashflow, cashflow, cashflow.[1] The general guidance from business.gov.au on managing cash flow holds for both.
What counts as an operating expense
A reserve is only as credible as the base it is sized against. The test is not whether a cost appears in the profit and loss, it is whether the cost keeps arriving after revenue stops. Payroll and its on-costs do. Rent and contracted software do. The variable cost of delivering a sale largely does not, because if sales stop, so does it.
| In the monthly base? | Why | |
|---|---|---|
| Payroll and on-costs | In, at full cost. | Superannuation, payroll tax and leave accruals keep running when revenue stops. Counting base salary alone understates the month materially. |
| Rent and contracted software | In, for the notice period at minimum. | You cannot switch these off this month. If a contract runs 12 months, the reserve has to carry it or you have to renegotiate it. |
| Cost of delivering sales | Mostly out. | Genuinely variable cost falls away with the revenue it serves. Anything that does not fall away is fixed cost wearing a variable label. |
| Growth and discretionary spend | Out. | Marketing, hiring and new tooling are the levers you pull in the scenario the reserve exists for. Including them inflates the target. |
| GST and PAYG held | Not reserve at all. | Money you are holding for the ATO with a due date attached. Treating it as buffer is the most common way a reserve turns out to be smaller than the balance suggested. |
One line founders routinely miscount is money the business holds but does not own. GST collected and PAYG withheld sit in the bank account and feel like reserve; they are a liability with a due date, and the ATO's business activity statement obligations decide when they leave. A reserve calculated on a bank balance that includes them is overstated by a quarter of a BAS cycle.
This is the same trap in a different form. Here is how the cash flow statement and the income statement differ, and why a profitable month can still go backwards on cash.
Where to hold it
The requirements are liquidity, separation and safety, in that order. Liquidity, because a reserve you cannot reach in 48 hours is not a reserve. Separation, because money left in the trading account gets spent by accident. Safety, because this is the one pool of money that is not there to earn a return.
In practice that means a business savings account or a short-dated term deposit at an authorised deposit-taking institution, with a maturity ladder if you are holding several months. Deposits with an Australian ADI are covered up to $250,000 per account holder per institution under the APRA Financial Claims Scheme, which is worth knowing if your reserve is large enough to split across more than one bank. What it should not be in is anything whose value moves, because the moment you need it is exactly the moment markets are unhelpful.
Building one from nothing
The mechanism that works is boring: move a fixed percentage of every receipt into the reserve account on the day it lands, before the money is available to spend. Percentage, not a fixed amount, so it flexes with a bad month instead of breaking the habit. Founders who wait for a surplus to appear never build one.
Where the money comes from is usually the cost base rather than revenue. Kaycee Singh, who built a tech finance function from zero, described a period at a small business where finding every cost saving possible was the priority.[2] That is the practical route: a first pass on discretionary spend funds the first month of reserve, and after that the percentage does the work.
The cleanest way to find that first month is a zero-based rebuild of the discretionary cost base.
A reserve is a decision, not a savings account
Held reserve is capital you have chosen not to deploy, and in a growth business that choice has a cost. James Haslam described Elmo's early strategy as a deliberate decision to grow fast by burning cash, a move that was underwritten by significant cash reserves in the bank.[3] The reserve was what made the aggression rational. The two are not opposites.
The reason to hold one even when your funding looks secure is that funding is a market, not a guarantee. Akbar Shah described banks facing situations where significant funding access was effectively shut, which is what forces backup plans and contingency measures.[4] A reserve is the version of that plan you can execute without asking anyone.
Who watches it
A reserve target that nobody reports against decays quietly. Deborah Lane, describing her day to day, put it simply: cash is king, and she is always monitoring it.[5] Always is the operative word. The reserve position belongs in the same weekly pack as the cash forecast, not in an annual policy document.
In a scaling company that is a job, not a habit. What founders scaling fast with external funding and burn rate front of mind every month actually need is a finance hire who can do the work and build the process while staying lean.[6] If the reserve rule only exists in the founder's head, it is the first thing that goes in a busy quarter, and no one will notice until the month it matters.
Common questions
How much cash reserve should a business have?
Three to six months of operating expenses is the usual rule of thumb, and the right end of that range depends on how predictable your receipts are. Long contracts and diversified customers justify the lower end. Lumpy revenue, seasonality or a single dominant customer justifies the higher end. The number is only as good as the cost base you calculate it against, so strip out genuinely variable costs and never count GST or PAYG you are holding for the ATO.
What counts as an operating expense for a cash reserve?
Any cost that keeps arriving after revenue stops. Payroll and its on-costs, rent, contracted software and insurance all count, at full cost including superannuation and payroll tax. The variable cost of delivering a sale largely does not, because it falls away with the sale. Growth and discretionary spend should be excluded too, since cutting it is one of the levers you would pull in the scenario the reserve exists for.
Where should a business hold its cash reserve?
Somewhere liquid, separate from the trading account, and not exposed to market movement. In Australia that generally means a business savings account or a short-dated term deposit at an authorised deposit-taking institution, laddered if you are holding several months. Deposits with an Australian ADI are protected up to $250,000 per account holder per institution under the APRA Financial Claims Scheme, which is a reason to split a large reserve across more than one bank.
How do you build a cash reserve if you do not have one?
Move a fixed percentage of every receipt into a separate account on the day it lands, before the money becomes available to spend. Percentages work better here than fixed amounts, since a lean month reduces the transfer rather than breaking the habit. The first month of reserve usually comes out of the cost base rather than revenue, which is why a hard pass over discretionary spending is the fastest way to start.
References
- How I think about it: almost every conversation includes the same challenge, cashflow, cashflow, cashflow.
- Kaycee Singh, who built a tech finance function from zero, on The CFO Track: for a small business, finding every cost saving possible was really important.
- James Haslam on episode 4 of The CFO Track, describing Elmo's initial strategy as a deliberate approach to grow fast by burning cash, supported by significant cash reserves in the bank.
- Akbar Shah on The CFO Track, on banks facing situations where significant funding access was effectively shut, necessitating backup plans and contingency measures.
- Deborah Lane on episode 5 of The CFO Track, describing her day-to-day responsibilities: cash is king, and she is always monitoring it.
- What keeps coming up: for founders and CFOs who are scaling fast, often with external funding and with burn rate front of mind every month, the need is for finance hires that can do the work and build the process, all while staying lean.