How much liquid savings does the typical business need to have? | ON DEMAND BOOKKEEPING
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How much liquid savings does the typical business need to have?

How much liquid savings does the typical business need to have_

How much liquid savings does the typical business need to have?

Having cash is good. It means the business is converting its inventory and receivables into cash and is liquid enough to meet its obligations. But is holding on to too much cash a bad thing?

Though most financial experts recommend maintaining cash for three to six months worth of operating expenses, there is no set formula for success for each venture. However, here some items to consider in determining what could be the comfortable level of cash for your business:

What are your business plans and priorities?

At the minimum, businesses need to have sufficient working capital (Current assets – Current liabilities) to conduct day-to-day business operations and address short-term needs. However, depending on the stage the business is in —just starting up or already stable— priorities and planned use for cash more than working capital could vary:

Safety net or precautionary reserves – All businesses need this buffer to keep the lights on in case of unexpected cash flow problems (e.g., large invoice isn’t collected, you suddenly get sick, product demand becomes volatile, or your business is at high risk).

Business expansion – Once the business is stable with positive cash flows, and you have a comfortable contingency fund, then you can build up cash for a major capital expenditure or expansion project. One useful tip for expansion is that you should somehow treat it as a separate venture in the sense that should the expansion fail, then the normal operating cash flows from your existing business shouldn’t be affected.

Potential investment opportunities – If you still have surplus idle cash after allocating for above items, then it might be tempting to pull it out of the business for yourself. However, before doing so, consider your long-term business plans and if investing in money market accounts or financial securities for the growth of the business would be more aligned with your strategy instead.

How liquid are you? – You have great plans for the business. But are you liquid enough to accommodate? One way to find out is by using the Defensive Interval Ratio (DIR = Defensive Assets / Daily Operational Expenses) which reflects the number of days the business can manage its daily operating expenses [(annual cost of sales + operating expenses – non-cash items such as depreciation) / 365] using its defensive assets (cash + net receivables + marketable securities) without touching non-current assets or tapping external financial sources.

Generally, the higher the DIR, the more liquid you are. If you are not comfortable with the resulting figure concerning your business plans, then it might be time to revisit your budget.

How much have you been spending and how much do you plan to spend? – The basic cash budget/forecast is computed by taking the beginning cash balance, adding cash receipts and deducting disbursements to come up with the ending cash balance. Historical cash flow reports would show how much cash the business has been using, and the business plan and/or financial forecast would give an idea of how much cash the business expects to use in the future. In preparing the cash forecast, incorporate some wiggle room to determine what would be a comfortable level once you factor in seasonal changes and consider the worst-case scenario, best-case scenario, and average expected operations.


Having too little liquid savings could lead to a shortfall in normal business expenses. But having too much idle cash in the bank would not be an efficient use of capital since it could also lead to lost returns and opportunities for business growth. The important thing is to understand your business liquidity needs and make the necessary plans to address these.

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