The people's voice of reason
The people's voice of reason
Running out of cash is a nightmare for small businesses, and it presents a real threat. Even profitable companies can find themselves in trouble with cash flow management when they don't have enough liquid funds to cover unexpected expenses or capitalize on sudden opportunities.
This leaves many business owners asking, “How much money should I keep in my business checking account?”
It’s not always a straightforward answer. Often, the ideal amount depends on several factors, including your industry and business type, operating expenses, plans for growth, and cash flow projections. You may also decide to maintain more or less in your checking account based on interest rates, business needs, and economic trends.
In this article, Bluevine will explain how much cash is ideal to have on hand, the benefits of business bank accounts, and some nuanced considerations when choosing a banking platform.
What you need to know
Determining the optimal amount of cash to keep on hand depends on several factors unique to your operation. While there’s no exact average cash on hand for small businesses, some experts recommend keeping three to six months' worth of operating expenses as a general rule. But your specific circumstances might call for more nuanced planning.
According to Ramon Liriano, COO of Elevated Tax Strategies, “The amount to keep in your business checking account depends on your risk tolerance and business type, but a solid rule is three to six months of overhead for moderate operations, or nine to 12 months if you’re more conservative.”
Liriano adds, “Be sure to customize this management strategy with your accountant so it fits your unique cash flow needs.”
This also leads to another common question: How much should a business have in savings alongside operational funds? Let’s explore the key considerations that should influence your decision.
Service-based businesses generally require less cash on hand (typically two to four months of operating expenses) because they don't carry the significant upfront costs associated with physical inventory or equipment. Manufacturing companies or retail stores may need larger cash reserves (often four to eight months of operating expenses) to handle inventory purchases and equipment maintenance, while professional service firms might operate efficiently with smaller balances, typically in the range of one to three months of operating expenses.
Your monthly burn rate—including payroll, rent, utilities, and other fixed expenses—serves as the foundation for calculating your minimum cash cushion. Businesses with higher fixed costs relative to variable expenses generally benefit from maintaining larger cash reserves (four to six months of expenses) to weather potential downturns, while those with more variable cost structures might manage with smaller reserves (around two to three months of expenses).
A common question for expanding businesses is: How much in cash reserves should a business have when planning for growth? Companies planning significant expansion, equipment purchases, or hiring initiatives should maintain higher cash reserves (typically six to 12 months of operating expenses plus projected growth costs). Generally, you'll want enough to fund planned initiatives plus a buffer for unexpected costs.
Having sufficient liquidity ensures you can act quickly on growth opportunities without resorting to expensive emergency financing or missing out altogether.
Seasonal businesses face unique challenges that require careful cash management (often needing six to nine months of operating expenses to cover slow periods). If your cash flow fluctuates unpredictably throughout the year, you'll need larger reserves to carry you through slower periods while maintaining enough flexibility to prepare for busy seasons. Businesses with steady, predictable cash flow can typically operate with smaller reserves (around three to four months of expenses).
Diversifying your business banking structure can optimize your earning potential and provide financial security. Most successful businesses maintain several types of accounts, each serving different purposes in their financial ecosystem. This approach allows you to balance accessibility with growth potential.
The most prudent way for businesses to manage cash flow, including excess cash, involves a structured method that can ensure liquidity, security, and growth potential.
If your business checking account doesn’t earn annual percentage yield (APY), you’re missing out on passive income. Now, you could move excess cash into a savings or money market account to earn more, as mentioned above. However, some business banking platforms let you open multiple checking accounts, or even sub-accounts to help you organize your finances the way you want––all while earning APY on your operating balances without needing to move money around.
“Our Elevated Cash Flow Method involves dividing funds into key buckets: 25–30% for taxes, 40–60% for owner’s pay, 15–25% for savings, and 10–20% for operations. You can also automate these splits using automatic transfer rules to avoid manual errors and safeguard yourself against overspending,”
Elevated Tax Strategies’ Liriano says.Of course, these percentages should add up to 100% and be adjusted based on your business’s revenue, operational needs, and projections.
Properly structured business bank accounts offer numerous advantages beyond simple cash storage. Here’s how dedicated business accounts can strengthen your company's financial foundation.
1. Improved financial tracking
Separate business accounts create clean financial records that simplify accounting, tax preparation, and financial analysis. This separation from your personal finances makes it easier to monitor business performance and identify areas for improvement.
2. Enhanced professional image
Paying vendors, employees, and taxes from dedicated business accounts projects professionalism and credibility. Clients and partners gain confidence when they see that your business operates with proper financial infrastructure.
3. Passive income generation
Strategic use of business accounts with high APYs allows your reserve funds to generate income even while sitting idle. The higher your balances and the better your rate, the more meaningful this passive revenue stream becomes.
4. Government-backed fund safety
FDIC-insured business accounts protect your funds up to $250,000, providing peace of mind that your company's financial foundation remains secure even if your banking institution faces difficulties. Some banking platforms will also offer extended FDIC coverage beyond the standard $250,000 amount, through something called a “sweep network.”
5. Strategic business safety net
Well-funded business accounts protect against unexpected challenges, from economic downturns to sudden expenses. This financial buffer gives you time to adapt without making panicked decisions that could harm long-term growth.
Once you understand the key factors that influence your cash needs, implementing a strategic approach can help you maintain the right amount. These practical tips will help you make informed decisions about your business checking account balance.
With the expectation of potentially multiple rate cuts in the near future, holding on to excess cash could seem less attractive due to lower interest earnings. But there’s no one-size-fits-all solution for cash flow management.
“Businesses aiming for growth should consider strategically reallocating cash reserves toward higher-return investments instead of letting funds sit idle,” recommends Liriano. “We advise clients to trim their operational savings slightly and redirect toward things like inventory, hiring and training, or property/equipment purchases—which may become more affordable with cheaper financing.”
He adds, “Always consult an accountant or trusted financial advisor for advice that’s tailored to your business.”
Not all business banking solutions are created equal. Finding the right partner requires evaluating several key factors that will impact your day-to-day operations and long-term financial health.
Products and services
Look for banking platforms that offer comprehensive business solutions beyond basic checking. This might include lending options, automated bill pay, business credit cards, and other services supporting business needs.
Interest rates
Even small differences in interest rates can significantly impact earnings on larger balances over time. Compare APYs across institutions, particularly for savings and money market accounts, where your reserve funds will be stored.
Fees
Monthly maintenance fees, transaction charges, and minimum balance requirements can quickly erode your cash position. Look for transparent fee structures that align with your typical banking patterns and volume.
Features
Modern business banking should include robust online platforms, mobile apps, seamless integrations with accounting software, and efficient payment processing capabilities that save you time and reduce administrative burden. Budgeting tools like sub-accounts can also be a useful feature for cash flow management.
Customer service
Access to knowledgeable representatives who understand business banking needs can prove invaluable when issues arise. Consider the availability of support channels and whether you'll have dedicated business banking specialists for different needs.
There’s no one-size-fits-all approach to budgeting for your business, particularly amidst the backdrop of interest rates that are expected to change rapidly. What’s most important is that business owners have a clear plan for how they want their business to grow and what’s most important for them. After developing a plan, business owners should choose a banking partner that offers products to make prudent budgeting easy and the features to allow for seamless ease-of-use.
This story was produced by Bluevine and reviewed and distributed by Stacker.
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