What are cash reserves and how much should your company hold?
Any good General or Quartermaster knows that reserves win battles. Just as a CFO, treasurer, or finance director knows a cash reserve can win out against unexpected costs or market moves. As mid-market firms continue to scale-up and enter new geographies, they must arm themselves with money and data to help combat shock currency, tariff or sales moves, or events such as broken equipment or a failed investment.
Why do cash reserves for businesses actually matter?
The money a company puts aside to fund an unexpected emergency without recourse to working capital makes them a more credible risk-aware organisation, which is less debt reliant and more resilient. A cash reserve can also help make a business appear more trustworthy to banks, lenders, and investors.
But what exactly are cash reserves, the common types, and how can a business calculate them? Let’s find out.
Cash reserves: meaning
Cash reserves refer to the money a business or individual saves to fund any unexpected or unplanned short-term expenses. They need not necessarily be cold, hard cash.
Having access to an instant-funded bank account – the most popular reserve option – or to highly liquid short-term investments like money market instruments or treasury bills to help fight off unforeseen complications can be useful.
Cash equivalents are also highly liquid investment vehicles and can be converted to cash easily. In a way, they are a business’s cash reserves in the balance sheet.
For mid-market firms, the challenge is not whether to hold reserves, it’s determining the optimal size, structure, and redeployment triggers that protect resilience without starving growth.
Pros and cons of establishing a cash reserve
Pros | Cons |
|---|---|
Rapid response capacity. Enables immediate action when unexpected needs arise, such as purchasing new equipment, onboarding critical staff, or covering emergency repairs. | Lower return on capital. Cash in low-yield accounts underperforms compared to potential investments, impacting overall ROI. |
Risk mitigation. Acts as a buffer against adverse FX movements, failed hedges, or sudden market changes without needing to secure emergency financing. | Opportunity cost. Idle cash may mean missed chances to fund expansion, M&A, or high-return projects. |
Stronger credit profile. Demonstrates financial discipline to lenders, investors, and rating agencies, potentially improving financing terms. | Inflation erosion. Holding excessive reserves in cash can reduce real purchasing power over time. |
Operational resilience. Supports continuity during revenue slumps, supply chain delays, or cost spikes. | Complacency risk. Large reserves can mask inefficiencies or discourage proactive cost management. |
How much of a cash reserve should you have?
Ideally, you should put aside enough to meet all your corporate treasury’s short-term obligations for at least 3-6 months, or a certain percentage of spare working capital should go into a standalone reserve that can be defined as a fund to get a company through any short-term emergency.
While mid-market firms typically target months of cover, multiple studies show thin buffers are common lower down the size spectrum. The JPMorgan Chase Institute’s long-running research finds the median small business has around 27 cash buffer days, with half of firms operating with fewer than 15 days — stark context for why disciplined reserve policies matter as companies scale. Use this as a cautionary reference point rather than a target
Where are cash reserves held or shown?
A company must review its financial statements, and preferably its cash flow forecast too, to ascertain the cash reserves amount. Generally, businesses use the previous year’s balance sheet or cash flow statement to find out its cash inflow and the amount it spent towards business expenses.
Dividing the amount of the total expenses by the number of months in the accounting period can help discover the monthly cash requirements of the business.
Multiplying this number by the number of months you’d like to build the cash reserve for should assist you in determining your business’s cash reserve amount.
Access our free cash flow projection template
How do cash reserves work? An example
For example, let’s assume that for company AN Other, total revenue and total expenses for the previous year were $200,000 and $120,000, respectively.
Then their monthly ‘burn rate’ for cash can be worked out by dividing the latter by the number of months in the year: 120,000 ÷ 12 = $10,000.
This indicates that AN Other must set aside at least $30,000 ($10,000 * 3) if it’s projecting similar revenue for the current year and wants to maintain cash reserves to cover the expenses for 3 months. Or $60,000 if it wants to establish or maintain a half-yearly cash reserve.
So step by step the calculation process is:
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Find your annual operating expenses
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From your last year’s P&L or cash flow statement
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Example: $120,000
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Work out your monthly burn rate
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$120,000 ÷ 12 = $10,000 per month
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Choose your coverage period
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Example: 3 months or 6 months of operating expenses
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Multiply monthly burn by coverage months
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3 months: $10,000 × 3 = $30,000
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6 months: $10,000 × 6 = $60,000
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Adjust for your situation
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Factor in seasonality, risk appetite, or expansion plans
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Update regularly with a live cash flow forecast
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Getting the ‘right’ amount to ensure business continuity without suboptimal liquidity management is the crucial task. You don’t want to hold excess cash that will lower returns or to underfund the reserve, which presents a higher risk. Using Agicap’s software to integrate forecasting data, real-time monitoring, customisable alerts and so on will all help to ensure a smooth flow of data and achieve this balance.
Naturally, the figures will differ for each firm but the core methodology remains the same.
Want to put these best practices into action? Download Agicap’s free Cash Flow Forecast Excel Template to easily plan and monitor your reserves.
Best practices and pitfalls in managing cash reserves
Best practices | Pitfalls to avoid |
|---|---|
Set a clear policy. Define your reserve target (e.g., 3–6 months of operating expenses), its purpose, and usage rules, and review quarterly. | Static reserve levels. Not adjusting for growth, seasonality, or changes in risk appetite. |
Link reserves to forecasting. Use live cash flow forecasts to keep your reserve target dynamic. | Over-hoarding cash. Holding too much idle, reducing ROI and signalling missed opportunities. |
Consolidate for visibility. Centralise account data to avoid trapped cash in subsidiaries or foreign accounts. | Fragmented accounts. Reserves scattered across entities without central oversight. |
Stress-test regularly. Model the impact of shocks like revenue drops or major capital needs. | Ignoring debt obligations. Not factoring in loan repayments, leading to sudden reserve drains. |
Balance liquidity with returns. Keep enough instantly accessible; place surplus in low-risk, interest-bearing instruments. | Relying on manual tracking. Using spreadsheets alone, which lag reality and miss warning signs. |
Automate monitoring. Use tools like Agicap to set alerts for dips or excess reserves. | No trigger points. Not having clear signals for when to top up or redeploy reserves. |
Watch this short video to discover how Agicap brings cash flow planning and reserve management to life for finance leaders:
Two types of cash reserves
There are two main types of cash reserves: operating and capital. Both serve different purposes, and mid-market companies benefit from holding each.
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Operating cash reserves. These are designed to cover shortfalls in your monthly operating expenses and keep the day-to-day business running smoothly. They help you:
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Absorb revenue losses if sales come in below forecast.
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Bridge gaps when there’s a significant timing difference between cash inflows and outflows, covering working capital needs until revenue is collected.
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Fund urgent, unplanned operating costs – for example, repairing a critical piece of machinery without disrupting production.
Without operating reserves, even short-term setbacks can cause missed payments, supplier issues, or operational downtime. They provide the liquidity you need to stay on schedule and protect your reputation with staff, suppliers, and customers.
2. Capital cash reserves. These are set aside for larger, long-term needs — such as replacing major assets, expanding facilities, or responding to strategic threats and opportunities. They can be used to:
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Finance unplanned or extraordinary capital repairs and replacements without delay.
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Fund regular but variable capital projects — for example, coping with higher-than-budgeted costs after adverse FX movements.
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Respond quickly to competitive pressures, such as price cuts to defend market share or accelerated investment in new capacity.
Capital reserves mean you can act on big-ticket projects or urgent strategic moves without scrambling for external finance. This is especially important in volatile markets or when timing is critical – a delay in funding can mean missed opportunities or competitive disadvantage.
For mid-market companies, the ideal approach is to manage both types of reserve at group and entity level, and by currency. A sterling-denominated parent with significant euro revenues, for example, needs an FX-aware reserve policy. Agicap’s bank consolidation and multi-account view can quickly surface trapped cash and currency mismatches, so you always know where you stand.
See Agicap in action: book your free demo and transform how you manage cash reserves across your group.
How Agicap can help meet cash reserve requirements
To avoid tying up too much cash in reserves – and missing out on growth opportunities – while still keeping your float where it needs to be, businesses need clear, real-time data they can trust.
Agicap makes this possible by linking seamlessly with the tools you already use – from Excel spreadsheets to full ERP and treasury systems – and pulling in data from multiple bank accounts into one clear, consolidated view. With that visibility, you can automatically top up reserves when needed and run the numbers through scenario models and dashboards to fine-tune your reserve strategy. Seasonal spikes, one-off events, or other unique business factors can all be built in, giving you the kind of granular, data-driven insight that’s hard to achieve without a connected platform.
Agicap strengthens emergency cash reserve management
Platform capability | How Agicap supports your cash reserves |
|---|---|
Cashflow forecasting | Helps to predict future reserve levels using historical trends, upcoming expenses, and expected revenues, so you always know if you’re on track with your target coverage. |
Scenario planning | Enables easy modelling of the impact of shocks like revenue dips, cost spikes, or delayed payments, helping you adjust reserves before problems hit. |
Real-time cashflow monitoring | Gives instant visibility of cash inflows and outflows, making it easy to see current reserve levels at a glance. |
Categorisation of transactions | Shows exactly where money is going, highlighting cost areas where freeing up funds could boost reserves. |
Debt and loan management | Ensures debt repayments are built into reserve planning, avoiding last-minute cash squeezes. |
Consolidation of bank accounts | Combines balances from multiple accounts and entities into one unified reserve view — no more hidden or trapped cash. |
KPI dashboards | Tracks liquidity ratios, reserve coverage periods, and other metrics that show whether reserves are healthy. |
Alerts and notifications | Warns you when reserves fall too low or when cashflow patterns change unexpectedly, so you can act fast. |
Integration with business tools | Syncs with accounting, ERP, and treasury systems for an accurate, up-to-date reserve position without manual updates. |
Real life example: Café Coton
In the Provençal town of Fuveau in southeastern France, the Café Coton shop, licensed by E.T. Diffusion, runs on a distinctly seasonal rhythm. Twice a year, ahead of the summer and winter collections, the business must commit to a surge of stock purchases, creating a sharp spike in expenditure long before the first sale of the new season is made. The cash outflow is substantial, and the payback only unfolds gradually as the season progresses.
A reserve is a good idea to mitigate against any undue weather impacts, adversely hitting demand, or a runaway hit that necessitates fast re-stocking of a popular item. The shop introduced Agicap to automatically manage its cash receipts, disbursements and flow, giving it better cash in/output data, which has additionally allowed it to establish a small reserve.
“I use the scenarios module in Agicap,” explains CFO, Sylvie Béteille. “It allows me to make assumptions in the event of unforeseen events.” A reserve means you can navigate any such events or even an unexpected ‘black swan’ event. The Café Coton example can be seen online in Agicap’s customer testimonials section.
The mid-market lesson here is to treat the reserve as dynamic. Café Coton’s buffer expands ahead of buying peaks and normalises as sales convert. The same logic applies to manufacturers with annual maintenance shutdowns, education providers with term-linked cash cycles, and D2C brands with promotional spikes. Agicap’s rolling forecast and alerting make the expand-and-contract model workable, without having to wrangle spreadsheets.
Read the full case study and other customer testimonials.
Cash reserves: review of key points
In summary, cash reserves make it easy for a firm to meet any sudden operating or capital expenses, but they must be calculated and maintained effectively. Good systems allows for automation and parameter alerts, so should be used to take control of any unwarranted costs. This lets businesses focus on leveraging opportunities and improving the bottom line, without worrying about their short-term future, removing the ‘pain point’ of uncertainty.
Other functions need to be up-to-date to ensure a cash reserve can function effectively, so forecasting must be on point, system integration, and risk opportunity and mitigation spotting must also be spot-on. You can rely on Agicap to bring up the reserves when they’re needed to battle unexpected shocks.
Frequently asked questions (FAQs)
How much cash reserves should a business or non-profit have?
There’s no one-size-fits-all answer, but a common target is enough to cover 3-6 months of running costs. If your income is unpredictable or you operate in a risky sector, you might want more. The goal is to sleep at night knowing you can keep the lights on even if things go sideways!
How do cash reserves work?
Think of them as your financial shock absorber. You put money aside, perhaps in an easy-access account or something safe like short-term government bills, so it’s there when you need it. Whether it’s fixing broken equipment, covering a slow sales month, or jumping on a great opportunity, reserves mean you can act quickly without scrambling for a loan.
How much cash reserves are needed for property or mortgage?
If you’re buying property, lenders like to see you have a cushion – often a few months’ worth of mortgage payments – in reserve. It reassures them you can keep up with payments even if your income dips for a while.
Why do companies keep cash reserves?
Because life happens. Sales drop, customers pay late, costs spike, or opportunities come out of nowhere. Reserves give you breathing space and options, without relying on expensive short-term borrowing.
Are there any cash reserve synonyms?
Yes, depending on the context, people might call them a cash buffer, liquidity cushion, rainy day fund, contingency fund, or emergency reserve. In corporate finance, you might also hear liquidity reserves or operational reserves. All of these essentially mean the same thing: money set aside so you can handle surprises without disrupting day-to-day operations.
What is a cash reserve account?
A cash reserve account is a dedicated bank or investment account set up to hold funds earmarked for emergencies, cash flow gaps, or planned future expenses. In a business context, it’s separate from your main operating account, making it easier to track and protect the money you’ve set aside. The account usually holds highly liquid assets (such as cash, money market funds, or short-term government securities) so the funds can be accessed quickly when needed.
What is the cash reserve ratio?
This is a banking term and not relevant for non-financial companies. It’s the minimum amount of customer deposits a bank has to keep on hand with the central bank. In this article, we’re talking about corporate cash reserves (the money your own business sets aside for a rainy day) which is a completely different thing.
