How much cash should a business keep in reserve?

The standard guidance mirrors personal emergency funds: three to six months of fixed operating expenses held in accessible cash. The reasoning is the same, that the reserve must cover the gap between a revenue disruption and either recovery or an orderly wind-down, and that businesses fail from running out of cash rather than from being unprofitable. Research from the JPMorgan Chase Institute examining actual small business bank data found the median firm held roughly 27 days of cash buffer, meaning most businesses operate far below the recommendation, which is context for how common cash-driven failure is.

How much you specifically need depends on volatility. A business with recurring contracted revenue, low fixed costs, and quick collection can operate safely at the lower end. A seasonal business, one with long project cycles and slow-paying clients, one with substantial payroll, or one in an industry exposed to sudden demand shocks needs considerably more. Calculate against fixed costs you cannot quickly cut, meaning rent, insurance, debt service, core payroll, and essential software, rather than against total expenses including variable costs that would fall alongside revenue.

Two structural points beyond the number. Where you hold it matters, since operating reserves should sit in a business savings or money market account earning something rather than in a checking account earning nothing, while remaining immediately accessible, and FDIC coverage is per depositor per institution, which becomes relevant for larger balances. And a committed line of credit is a complement rather than a substitute: it costs little when unused, provides a second layer of protection, and should be arranged while the business looks healthy, because lenders withdraw availability precisely when conditions deteriorate. Treating a credit line as your only reserve is the arrangement that fails in a genuine downturn.