Let’s play a quick game
Open your business banking app and look at the number.
Did you just do a proud fist pump, or did your soul momentarily leave your body?
If it’s the second one, don’t worry, you’re in good company! The age old question for every business owner (right up there with “Where did I leave my phone charger?”) is: How much cash do I actually need in the bank?
Let’s break it down, so you can sleep at night (and maybe even take a guilt-free holiday).
The Golden Rule:
Your tax savings do NOT count as your cash buffer.
Sorry! That tidy sum you’ve been heroically stashing for HMRC is already spoken for. It’s not your rainy-day fund, it’s more like your “avoid angry letters from the taxman” fund.
Always keep your tax money in a separate, sacred account. Pretend it’s locked in a vault guarded by dragons.
The Magic Number (and Why It Matters)
The general advice for most businesses?
Aim to keep at least 3 to 6 months’ worth of essential running costs in your business bank account, after setting aside your tax savings.
Why? Because clients pay late, suppliers sometimes want money early, pandemics happen (remember those?), and what about that amazing business opportunity that is around the corner.
💷 UK Business Cash Reserves: A Reality Check
While aiming for a 3–6 month cash buffer is a prudent strategy, the reality for many UK small businesses is quite different.
📉 Alarming Statistics:
- 13% of UK businesses reported having no cash reserves, and an additional 28% had a buffer of three months or less, according to the Office for National Statistics in 2022. (NatWest)
- The average UK small business experiences more than four months of negative cash flow each year, with nearly 23% facing this for over six months annually. (Xero)
- The average cash held by UK SMEs has halved, dropping from £188,474 to £90,320, highlighting a significant decline in financial cushions. (Capify)
🧠 What This Means for Your Business
These figures paint a clear picture, many businesses are operating with minimal financial safety nets, leaving them vulnerable to unexpected expenses or downturns. Building and maintaining a robust cash reserve is not just advisable, it’s essential for resilience and long-term success.
What Counts as “Essential Running Costs”?
- Payroll (including your own salary, no martyrdom here, please)
- Rent, utilities, insurance
- Supplier bills
- Subscriptions/software
- Basically, everything you’d still have to pay if you made no sales for a few months
By Stage of Business
Startup:
You’re in the “how much does printer ink cost?!” phase.
Keep at least 3 months of costs. If you’ve got funding, maybe even more, since you might not make a profit for a while.
Established Business:
You know your numbers, your seasonal swings, and when things get hairy.
3–6 months is your zone. The more overheads you have, the more you want to buffer.
Growth/Scale-up:
Cash seems to fly out the window faster than it comes in.
6 months (yes, really) will help you weather “invest and wait” phases, hiring sprees, and new product launches.
A Quick Formula
Monthly Essential Costs x Number of Months You Want to Cover = Target Buffer
Example:
- Monthly essential costs (including your salary): £8,000
- Buffer goal: 4 months
- Target cash buffer: £32,000 (plus your tax stash, which lives in a different account!)
Pro Tips & Cautions
- Never count your tax money as “spare cash.”
HMRC is not known for their sense of humour. - Automate your savings: Move a set % of each invoice into your buffer account, and a separate % into your tax account.
- If you go below your buffer, treat it like a DEFCON alert: Cut expenses, chase debts, and review pricing.
But Isn’t This Too Conservative?
Look, you might hear tales of swashbuckling entrepreneurs who “put it all on red” and ride the cashflow rollercoaster with £7.54 in the bank.
Those are also the stories that end in tears, panic, and late-night Google searches for “how to explain insolvency to my spouse.”
In Summary
The best time to build your cash buffer is when you don’t need it.
Start now. Make it a habit. Sleep better. Avoid surprise “fun” with HMRC.
Take Action
- Assess Your Current Cash Position: Understand how many months of operating expenses your current reserves cover.
- Set a Realistic Goal: Aim to build up to at least 3–6 months of essential expenses in reserve.
- Separate Tax Funds: Remember, your tax obligations should be set aside separately and not counted as part of your emergency funds.
- Regularly Review and Adjust: As your business grows or changes, revisit your cash reserve goals to ensure they remain adequate.
By proactively managing your cash reserves, you position your business to weather financial storms and seize growth opportunities with confidence.
If you need assistance in evaluating your financial health or creating a plan to build your cash reserves, feel free to reach out. We’re here to help you navigate the numbers and strengthen your business’s financial foundation.
Want help working out your ideal buffer, or need a hand with cashflow forecasting? Drop us a message! We love spreadsheets more than is healthy, and we won’t judge your current bank balance (promise).
