Once an owner understands that profit and cash aren't the same thing, the next question always comes fast: fine, so how much should I actually be sitting on.
You'll find a version of "three to six months of operating expenses" almost anywhere you look. It's a reasonable starting point, and also not specific enough to be useful for your business. A dental practice with insurance reimbursement delays, a staffing firm running payroll weekly while clients pay on net 45, and a janitorial company with a handful of large contracts all have wildly different cash risk profiles, even at identical revenue.
Start With Your Actual Burn, Not an Average
Pull last month's full list of expenses. Payroll, rent, insurance, loan payments, software, supplies, everything that leaves the account whether or not a single new dollar comes in. That total is your monthly burn rate.
Multiply that by your target coverage window, and you get a real reserve target instead of a generic one. The window you choose should reflect your own risk, not a number from an article written for a business that isn't yours.
What Should Actually Move Your Target Up or Down
How long you wait to get paid. A company collecting cash on delivery carries far less risk than one extending 60 or 90 day terms to its biggest customers. If a chunk of your revenue sits in receivables for two months at a time, your reserve needs to cover that float, not just your monthly expenses.
How concentrated your revenue is. If three customers make up most of your book, one late payment or one lost contract can hit harder than the same dollar amount spread across forty accounts. Concentration risk should push your target higher, even if your margins look healthy.
How seasonal or lumpy your revenue is. A business with steady monthly billing can run a leaner reserve than one waiting on a few large annual contracts or riding seasonal demand swings.
Whether you have a credit line you can actually draw on. A reserve and a line of credit aren't the same protection, but a business with fast, reliable access to credit can reasonably hold less cash than one that would need weeks to arrange financing under pressure.
A Rough Range to Work From
Most owner operated businesses land somewhere between two and six months of operating expenses, with the low end fitting predictable, cash on delivery businesses and the high end fitting anyone with long payment terms, concentrated customers, or seasonal swings. If you're not sure where you fall, run the math on your actual receivables aging and payment terms before picking a number, rather than defaulting to the middle of that range out of convenience.
Too Much Cash Is Its Own Problem
It's worth saying plainly: a reserve that's too large isn't free. Cash sitting idle in a checking account isn't paying down debt, funding equipment you need, or earning a return anywhere. Once you've hit your target, the conversation should shift from "how much more should I save" to "what should this extra cash actually be doing for the business."
The right reserve isn't a number you borrow from a blog post. It's a number you calculate once, and then revisit every time your payment terms, customer mix, or fixed costs change enough to move it.