Most owners don’t run out of cash because the business is bad. They run out of cash because they can’t see what’s already in motion.
I got a call like that once. The owner wasn’t calling to ask about profit. They were calling because payroll was in the morning and the “cash” they thought they had was already spent.
Here’s what had happened.
They had a decent bank balance on Friday. Not a lot, but enough to breathe (they thought).
Then the weekend went by.
Monday morning the ACHs started clearing. A tax pull hit. A couple big checks cleared that were cut last week. Payroll was queued. A vendor payment was approved because “we’ve got the money.”
By Tuesday morning, the bank balance told a completely different story than it did the Friday before.
And here's the thing: this was the same business that it was on Friday. The business that the owner felt comfortable in, the owner now felt like he had "ants in his pants".
The problem was they couldn't see what was already in motion.
And that's how most cash crises are. Sometimes you have true business problems but other times you have problems that happened because of spend weeks and months ago or or money that hasn't come in for one reason or another.
When I talk to clients about their cash reserves, you get a lot of different opinions and ideas. Traditionally in personal finance you can think of this as an emergency fund but in business I really think of it as something a little bit different: it’s a decision buffer.
A reserve is the time you buy yourself to make a good decision.
So today we're going to walk through a five-part cash reserve system and the things you need to be thinking about in ultimately trying to help you answer the question, “How much should I keep in my bank account?”
THE 5-PART CASH RESERVE SYSTEM
1. KNOW YOUR USABLE CASH (NOT YOUR BANK BALANCE)
Your bank balance is a number. It is not your cash position.
What you don't see is all the money that you've committed elsewhere already.
You start with your bank balance and then you have to subtract out:
- Outstanding checks and known clearing items
- Approved or committed payments (even if they have not left yet)
- Payroll and tax pulls that are scheduled
Cash planning starts with what you can actually deploy, not what the bank app shows.
This is where 13-week cash flow comes in: it can help you predict what is going to come in the future but there are also other obligations that come into play and aren’t initially in that. This goes to the timing.
2. KNOW YOUR TIMING GAPS (WHEN CASH LEAVES BEFORE IT ARRIVES)
This is the part that makes businesses so complicated. In personal finance you generally know what the inflows are going to be but in businesses, that variance can leave it hard to sleep at night.
Your business can have “enough cash” in total and still get squeezed because the timing is wrong.
A few common timing gaps:
- Payroll leaves on a set schedule. Collections do not.
- ACHs clear tomorrow. Wires clear today. Checks clear whenever they feel like it.
- You did the work, but you haven’t invoiced yet.
- You invoiced, but you won’t collect for 30, 45, 60 days.
- The line of credit is “available” until the borrowing base shifts or AR gets old.
The reserve system has to ask “when,” not just “how much.”
This work, outside of collecting on outstanding accounts receivable, is often work that needs to happen months in advance. It's the playing around with your cash conversion cycle and understanding how to manipulate and make sure that you lessen the lag between cash going out and cash coming in.
To see where I've written on cash conversion cycle in the past, you can read about it here.
3. KNOW YOUR RESERVE FLOOR (THE NUMBER YOU DO NOT CROSS)
Because of the way we do it in personal finance, the tendency is to say we want this many months but in businesses, especially ones with smaller profits, thinking in terms of months of cash sounds and frankly is impossible.
Instead, we want to think in terms of a cash floor.
The idea of the cash flow is to understand that when cash is coming in and out of the business, there's a number that you should not go below. And when you do go below that number, that should be a sign to stop and reassess.
We've talked about this before and we've actually put a formula to it. The formula is a little bit stiff but it still gives you a decent idea of what you should take into account.
One key here is looking through the seasonality of the business and understanding when you have cash going out of the business for an extended period of time. Some seasonal businesses can find themselves with 3-4 months in a row “bleeding” cash.
In those situations, they’d need multiple floors:
- Going into the seasonal dip
- During peak season
- During the dip
When you have a floor, the week gets simpler.
You stop debating every purchase emotionally. You compare it to the floor.
To read more about the formula we used, go here and read this article: THE CASH RESERVE FORMULA
4. KNOW WHEN TO ACT (THE TRIGGERS)
Owners don’t fail because they didn’t know a reserve number.
They fail because they had no trigger system, so they wait until it feels urgent.
Pick a few triggers that force action early. Examples:
- If usable cash drops below the reserve floor for two consecutive weeks, we cut discretionary spend and tighten approvals immediately.
- If AR over 60 days crosses a threshold, we escalate collections and change billing terms for new work.
- If payroll coverage falls below X weeks, we slow hiring and pause non-essential projects until it’s back.
The point is not the perfect trigger. The point is that you decide in advance, while you are calm.
DON’T OPERATE SCARED
Cash reserves don’t exist to make you feel rich.
They exist to keep you from making scared decisions.
When you can see what’s already in motion, you stop reacting to the bank balance like it’s a mood ring.
If you want a simple next step: build a usable cash view this week and map the next two payroll cycles against your expected receipts. Then pick a reserve floor and write down your triggers.
