Are you putting away enough money? How to Save Money for Your Business

More businesses fail because of cash flow problems than because of bad products. Many entrepreneurs focus on growing their business’s revenue and expanding into new markets, but they often forget about one important thing that sets successful businesses apart from those that struggle to stay alive: having enough cash on hand.

Having money in an account isn’t enough to build a strong cash reserve. You also need to make your business financially strong so it can handle unexpected storms, take advantage of opportunities, and keep running during lean times. Your cash reserve is the financial base that keeps your business stable, whether you’re dealing with seasonal changes, a recession, or a sudden equipment failure.

A lot of business owners wonder, “How much should I save?” There isn’t one answer that works for everyone, but there are tried-and-true methods and formulas that can help you make your choice. Knowing how to build your cash reserve the right way can mean the difference between going out of business during hard times and coming out stronger than your competitors.

This complete guide will show you how to build and keep healthy cash reserves for your business, from evaluating your needs to putting them into action.

Understanding Cash Reserves: The Safety Net for Your Business

A cash reserve is money that your business keeps on hand for unexpected costs, opportunities, or operational needs. Cash reserves are different from working capital because they are set aside as your financial safety net.

In banking, what is a cash reserve? Banks say that business cash reserves are funds that are easy to get to and can be turned into cash within 90 days without losing a lot of money or paying a lot of fees. This includes short-term certificates of deposit, money market accounts, and savings accounts.

Cash Reserve vs. Regular Savings: What You Need to Know

A cash reserve account and a savings account are both ways to save money, but they have different purposes and are easier to get to. Personal savings accounts are all about your own financial goals, while business cash reserves are all about keeping the business running and being able to change plans as needed.

Your cash reserves show up on your balance sheet under current assets. This means that the money is available right away and isn’t tied up in inventory, accounts receivable, or fixed assets.

Finding out how much it costs to run your business each month

First, make a list of all the monthly costs that are necessary for your business to run:

• Costs that don’t change: Rent, insurance, loan payments, salaries, utilities 
• Costs that change: Shipping, marketing, professional services, and raw materials
• Costs that are partly variable: Phone bills, software subscriptions, and maintenance contracts

Make a detailed spreadsheet that shows how much you’ve spent on these things over the past year. This historical data shows trends and helps you find seasonal changes that affect your cash flow.

Looking at patterns in cash flow

Review your cash flow statements to understand when money comes in and goes out. Pay attention to:

• Seasonal trends: Do you experience slower periods during certain months? 
• Cycles of payment: How long does it usually take for customers to pay?
• Expense timing: Are there months when you spend more money because of yearly fees or buying new equipment?

Finding Financial Risks and Chances

Think about possible situations that could affect your cash flow:

Things that could go wrong:

• Economic downturns that hurt customer demand
• Delays or defaults in payments from key customers
• Equipment breaks down and needs to be replaced right away
• Regulatory changes increasing compliance costs 
• Disruptions in the supply chain that affect inventory

Things that make an opportunity:

• Seasonal demand spikes that need more stock
• Competitors going out of business opens up new market opportunities.
• Upgrades to technology that might make things run more smoothly
• Possibilities for growth in new markets or places

Making Savings Goals That Are Realistic

Most financial experts say that the new business will need enough money to cover at least three to six months of operating costs. But your specific needs depend on a number of things.

The Formula for Cash Reserves

To figure out how much money you want to save, use this cash reserve formula:

Basic Formula: Target Cash Reserve = Monthly Operating Expenses × Number of Months of Coverage

Enhanced Formula: (Monthly Fixed Costs × 6) + (Monthly Variable Costs × 3) + Emergency Fund Buffer (10-20% of total) 

Things to think about for your industry

Different types of businesses need different amounts of cash on hand:

• Service businesses need 3 to 4 months’ worth of expenses (they don’t need as much inventory).
• Retail businesses need to keep 4 to 6 months’ worth of expenses on hand (for inventory reasons).
• Manufacturing costs 6 to 8 months of expenses (risks to equipment and the supply chain).
• Businesses that are only open for a few months at a time: 8–12 months of costs (long periods of low revenue)

Cash Reserve Examples for Different Types of Businesses

For a consulting firm, an example of a cash reserve is:

• $15,000 a month in bills
• $45,000 (3 months) is the target reserve.
• Reasoning: Low fixed costs, predictable revenue, minimal inventory 

For a retail store, here’s an example of a cash reserve:

• Monthly expenses: $25,000 
• The goal is to save $125,000 in five months.
• Reason: investing in inventory, seasonal changes, and rent payment

Ways to Build Cash Reserves That Work

To build up a large cash reserve for your business, you need to use systematic methods that don’t get in the way of your growth or daily operations.

Strategy 1: The automated savings method

Set up automatic transfers to move a set percentage of your income into your reserve account. Start with 5% to 10% of your monthly income and change it based on how comfortable you are with your cash flow.

Steps to put into action:

1. Set up a separate high-yield savings account for reserves.
2. Figure out how much you want to save each month
3. On days when money usually comes in, set up automatic transfers.
4. Review and adjust quarterly based on the performance of the business 

Strategy 2: Making the most of your money

Find and cut out extra costs to free up money for savings.

Quick wins:

• Look over all of your subscription services and cancel the ones you don’t use.
• Talk to suppliers about getting better rates for early payment discounts.
• Take steps to save energy in order to lower your utility bills.
• Optimise your inventory levels to lower carrying costs.

Deeper cuts:

• Talk to your landlord about lowering your rent or think about moving to a cheaper place.
• Look over your insurance policies to see if you can get better rates or coverage.
• Combine software tools into solutions that can do more than one thing.
• To save money on office space, make it possible for people to work from home.

Strategy 3: Increasing Income

Make more money by making smart changes to your revenue.

Short-term tactics:

• Give customers discounts for paying early.
• Set up payment plans for big purchases
• Make seasonal sales to even out changes in your income.
• Start referral programs to get more customers.

Plans for the long term:

• Get regular income through contracts or subscriptions.
• Add more services to your offerings to raise the average value of each customer.
• Go into new markets or groups of customers
• Put money into marketing channels that have been shown to work.

Strategy 4: Great management of inventory

Bad inventory management keeps cash that could boost your reserves tied up.

Ways to optimise:

• Order non-seasonal items just in time.
• Use ABC analysis to put high-value, fast-moving inventory at the top of your list.
• Talk to important suppliers about consignment deals.
• Set up drop-shipping relationships for unique items

Strategy 5: Talk about the terms of payment

Better payment plans can help you get your money faster.

With customers:

• Give customers different ways to pay, such as with credit cards.
• Add late fees to payments to get people to pay on time.
• For big orders or custom work, you need to put down a deposit. For quick cash, think about factoring or invoice financing.

With suppliers:

• Talk about longer payment terms (30 to 60 days).
• When you have the money, take advantage of early payment discounts.
• Establish credit lines with key suppliers 
• Think about financing programs for suppliers

Using financial tools and resources to their full potential

It’s easier than ever to build and keep an eye on cash reserves with modern financial management tools.

Software Solutions for Money

Cash Flow Management Platforms:

• QuickBooks Cash Flow: Predicts future cash positions 
• Float: Helps with scenario planning and predicting cash flow
• Pulse: Lets you see your cash flow over time and make predictions.

Accounting Integration:

• Xero: Links banks and gives you up-to-the-minute information about your money
• FreshBooks: Keeps track of income and expenses and lets you set savings goals.
• Wave: A free choice for small businesses that need basic reserve tracking

Banking Options for Cash Reserves

High-Yield Business Savings Accounts:

• Look for accounts that pay 2% to 4% interest each year.
• Ensure FDIC insurance coverage up to applicable limits 
• Think about accounts that don’t require a minimum balance.

Accounts for Money Markets:

• Interest rates that are higher than those on regular savings
• Limited ability to write checks in case of emergencies
• Interest rates that go up or down depending on how much money you have

Short-Term CDs:

• Terms of 3 to 6 months for part of the reserves
• Rates that are higher than savings accounts
• Laddering strategy for keeping money flowing

Professional Advisory Resources

When to Talk to Financial Experts:

• Yearly checkups on your financial health
• Big changes in business or plans to grow
• Uncertain economy that needs strategic changes
• Difficult tax consequences of reserve strategies

Types of Advisors:

• CPAs who help you find tax-efficient ways to save money
• Financial planners who focus on the finances of businesses
• Banking relationship managers for the best account structures
• Business coaches to help you run your business more efficiently

Keeping an eye on and taking care of your cash reserves

Building your reserves is only the beginning—maintaining them requires ongoing attention and strategic decision-making. 

Regular schedules for reviews

Monthly tests:

• Compare actual vs. projected cash flow 
• Check on how well you’re doing with your reserve goals.
• Find out about upcoming costs or chances

Deep dives every three months:

• Look at patterns that happen at different times of the year and change your goals.
• Look over and improve the categories of expenses
• Check to see if your reserves are enough based on changes in your business.

Strategic reviews every year:

• Figure out new target reserve amounts based on growth
• Check the return on reserve investments
• Change your plans based on changes in the industry.

When to Use Your Savings

Set clear rules for getting to cash reserves:

What to use it for:

• Real emergencies that affect how a business runs
• Repairs or failures of equipment that were not planned
• Economic downturns that force changes in how things work
• Strategic opportunities with clear ROI projections 

Don’t use reserves for:

• Regular operational shortfalls
• Planned purchases of equipment (budget separately)
• Projects to grow that don’t have strong business cases
• Loans or personal costs

Putting back used reserves

When you do use reserves, make sure to restock them first:

1. Immediate answer: Cut back on spending that isn’t necessary for a while
2. Short-term goal: Boost automatic savings transfers
3. Medium-term strategy: Start new ways to make money
4. Planning for the long term: Adjust reserve targets based on lessons learned 

Advanced strategies for cash reserves

Think about more advanced ways to handle your money as your business grows.

Cash Reserve Loans and Credit Lines

A cash reserve loan or line of credit can help you build up your real reserves:

Advantages:

• Getting money without using up reserves
• Cheaper than borrowing money in an emergency
• Keeps reserves for real emergencies

Things to think about:

• Costs of interest on borrowed money
• Requirements for credit and how to get it approved
• Personal guarantees that might be needed

Strategy for a Multi-Tiered Reserve

Think about having several levels of reserves instead of just one big one:

• Tier 1: Checking and savings accounts that are available right away – Costs for one month
• Tier 2: Short-term access, like money market accounts and short CDs – 2 to 3 months’ worth of expenses
• Tier 3: Strategic reserves (long-term investments) that cover 3 to 6 months’ worth of expenses

Building a reserve that is tax-advantaged

Talk to tax experts about:

• Contributions to retirement plans that help with cash flow
• Business savings accounts that save you money on taxes
• Strategies for when to recognise income and expenses
• Buying equipment that helps with taxes and makes the business run better

Making your finances more stable in the long term

Strong cash reserves are the basis for a business’s long-term success and chances to grow. Companies with enough cash on hand can invest in growth during tough times, get better deals from suppliers, and take advantage of strategic opportunities that their competitors can’t because they don’t have enough cash.

Building up a lot of cash reserves takes discipline, which also helps everyone in your organisation develop better money habits. Regular checking, strategic planning, and planned saving methods all make it easier to manage your money and make decisions.

Keep in mind that building up your cash reserve is a process that never ends. Your reserve needs will change as your business grows and changes. Regularly checking and changing things will keep your financial foundation strong, no matter what happens in the market or in your business.

The most important thing is to start with a clear plan and keep making progress towards your goals, whether you’re just starting to build your cash reserve or trying to make the most of the reserves you already have. For any serious business owner, the work is worth it because having enough cash reserves gives you peace of mind and strategic flexibility. Are you ready to take charge of your business’s money and build up the cash reserves that will keep your company going? Business Kiwi’s main job is to help businesses come up with detailed financial plans that are tailored to their needs and goals. We have a lot of experience and can help you with every step of the process, from the first assessment to the implementation and ongoing monitoring. Make an appointment with us today to start laying the financial groundwork your business needs.