The general guideline is 3-6 months of operating expenses. That range exists because the right number varies based on how your business actually works.

Push toward the lower end if you have recurring revenue, diversified clients, and low fixed costs. Push toward six months or more if your revenue is seasonal, you depend on a handful of large clients, or your fixed costs are high relative to your margins. Contractors in MetroWest who go quiet during winter need larger reserves than a consultant with steady monthly retainers.

Operating expenses means the bills that keep coming whether you have revenue or not. Rent, insurance, loan payments, base payroll, utilities, software subscriptions, and any essential vendor costs. Don’t include cost of goods sold or variable labor tied to revenue you might not have. You’re calculating what it costs to keep the lights on and the business functional during a slow period, not what it costs to operate at full capacity.

Add a buffer for the unexpected. Equipment breaks. A key client delays payment. Your truck needs a new transmission. These don’t happen every month, but when they do, you need cash available without scrambling for a line of credit or putting it on a card.

Once you have a target, put the reserve in a separate account. Money sitting in your operating account gets spent. A separate savings account with automatic monthly transfers builds the reserve without you thinking about it. Set rules for when you can draw from it and how quickly you replenish after a draw. Cash reserve planning works best when it becomes a system rather than a goal you think about occasionally.

Most small business owners underestimate what they need because they calculate based on good months rather than realistic worst-case months. If you run a bookkeeping services MetroWest engagement with us, we can help you model different scenarios and set a target that reflects your actual risk exposure rather than a generic rule of thumb.

Start with three months as a minimum floor. Build from there based on what you know about your business. Having the reserve matters more than having the perfect number.