For small and medium-sized businesses, maintaining a healthy cash buffer is essential for long-term success. Whether you’re running a local service company, a SaaS startup, or a construction firm, having cash reserves gives you the freedom to weather downturns, cover emergency expenses, and pursue growth without added financial stress. But have you ever wondered, “How much cash should a small business keep in reserve?”
It’s one of the first things a Fractional CFO will look at when evaluating your financial health. Why? Because too little cash can create panic in a downturn. Too much, and you’re sitting on capital that could be working harder for you.
How Much Cash Should You Keep?
There’s no one-size-fits-all answer, but most experienced Fractional CFOs recommend three to six months of operating expenses in reserves.
Here’s how that might vary:
- SaaS companies and high-growth startups: Aim for 6+ months due to unpredictable revenue. A SaaS Fractional CFO can help tailor a reserve strategy.
- Stable SMBs: Typically 3–4 months is sufficient.
- Seasonal businesses: May need 6–9 months to stay afloat during slow periods.
Many businesses fall short—recent data shows the median small business holds only 27 days of cash buffer.
Why a Cash Buffer Matters
A reserve isn’t just for emergencies—it’s a strategic tool that:
- Bridges cash flow gaps
- Reduces reliance on loans or credit lines
- Covers emergencies like repairs or tax bills
- Gives you confidence to invest in new hires, equipment, or marketing
What Happens Without a Cash Buffer?
| Situation | With Cash Buffer | Without Cash Buffer |
| Client pays 60 days late | Operations continue | May delay payroll or bills |
| Equipment failure | Covered by reserves | Requires high-interest loan |
| Revenue drops 50% for 2 months | Can maintain staffing | May require layoffs or cuts |
| Growth opportunity arises | Can reinvest confidently | Missed due to tight cash flow |
Best Practices for Managing Cash Buffers
- Know your true operating expenses. Include all fixed and variable costs.
- Set a goal based on your risk and growth plan. Start small, build gradually.
- Forecast regularly. Reassess quarterly as your business evolves.
- Automate saving. Transfer a set percentage of profits to your reserve each month.
- Create usage rules. Define what qualifies as a legitimate reason to dip into reserves.
- Keep it liquid. Use savings accounts, money market funds, or short-term bonds.
- Review often. Inflation and business growth should influence reserve size.
Final Thoughts
A well-managed cash buffer is more than just a safety net—it’s a growth enabler. If you don’t yet have a clear reserve strategy, a Fractional CFO can help you set one based on your industry, risk profile, and goals.
Want help building your cash buffer plan?
Reach out today to schedule your free consultation
