Question
How much cash should a small business keep?
The common rule of thumb is three to six months of costs. The right number for you depends on how steady your income is and how quickly you could cut costs if you had to.
Work out your own number
Add up a normal month’s costs: wages, rent, suppliers, loan repayments, everything that leaves the account. Divide your cash in the bank by that figure. The answer is your months of cover.
Example: costs of 40,000 a month and cash of 100,000 is two and a half months of cover.
What changes the answer
- Uneven income (seasonal sales, a few large customers): aim higher
- Customers who pay late: aim higher, or fix collections first
- Costs you could cut quickly: you can hold less
- A loan or overdraft facility you can rely on: you can hold less, though facilities can be withdrawn
Cover is a snapshot; a forecast is the film
Months of cover tells you where you stand today. A 13-week cash forecast shows the low point coming, while there is still time to act.
Have it worked out on your own figures
Big4CFO checks your books to the cent and produces this every month, from your own records. One-time reports cost $49 (one month), $99 (three months) or $199 (twelve months). Monthly plans start at $349 a month (Foundational), with Growth at $599, Leverage at $899 and Capital Stack at $1,999.
Questions
- Is VAT or sales tax in the bank part of my cash?
- No. Tax you have collected is owed to the tax authority. Leave it out when you count your cover.
See it on your own figures
One-time reports from $49, delivered within minutes. Monthly plans from $349. Every payment carries a 14-day money-back guarantee.