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There are two kinds of small business owners.
The kind who lose sleep because the account is too low, and the kind who don’t realize that the account being too high is also a problem.
Most CPAs only talk about the first one.
If you’ve built your business to the point where you’ve got real cash sitting in checking, congratulations, that’s the harder version of this problem.
You still need to solve the question of how much cash should you keep in your business.
Most advice says hold three to six months of operating expenses in cash.
Fine as a rule of thumb. The trouble is, “operating expenses” is doing a lot of work in that sentence, and “cash” usually gets interpreted as “checking account,” which is the worst place to park reserves.
Operating expenses mean everything you have to pay to keep the doors open if revenue stopped tomorrow. Rent, payroll, insurance, software, utilities, loan payments, the basics. It does not mean total expenses. Things like inventory, marketing, and owner draws flex with revenue.
Add up only the fixed must-pay costs for one month, multiply by three to six, and that’s your reserve target.
The right number depends on how predictable your revenue is.
A business with steady recurring revenue, say a bookkeeping firm with monthly retainers, can run on three months. The income is predictable, and the gap between a slowdown and a recovery is short.
A seasonal business needs more. An HVAC business in DFW makes most of its money in summer and a chunk in winter. Spring and fall are slower.
Six months of reserves is closer to right, and timing matters: you want the cash to be highest going into your slow season.
A project-based business with lumpy revenue, real estate, construction, and custom work, often needs nine to twelve. One slow quarter shouldn’t put you in survival mode.
Late paying vendors to make payroll. Skipping owner draws. Putting routine expenses on a credit card you can’t pay off the same month. Avoiding a needed equipment purchase because it’d drain the account. Estimated tax payments are going on the card.
Any of those is a sign that cash reserves are too thin, even if the business is profitable on paper.
This one’s more subtle. If you’ve got nine months or a year of fixed costs sitting in a low-interest checking account, you’re losing money to inflation every day. That’s not safety. That’s lazy capital.
Other signs: you keep meaning to invest in equipment, marketing, or a second location, but you “can’t afford to part with the cash” even though the math says it’d pay back.
You’re personally pulling smaller draws than your business can support because you’re nervous about touching the reserves.
If the reserve has grown to two or three times what your runway target is, the question isn’t whether to deploy it. The question is where.
In rough order of priority:
First, max out your tax-advantaged retirement accounts. A SEP-IRA, Solo 401(k), or defined benefit plan can move significant money out of business income and into your retirement, often with deductions that make it cheaper than you’d expect. For a profitable S corp owner, this is usually one of the highest-return moves available.
Second, if you have business debt above 6-7%, pay it down. The guaranteed return on retiring expensive debt usually beats anything else you could do with the cash.
Third, move reserves out of checking. A high-yield business savings account or a short-term Treasury ladder can earn meaningfully more than checking with virtually no risk and same- or next-day liquidity. There’s no reason your operating reserve should be earning 0.01%.
Fourth, reinvest in the business if there’s a real return on the investment. Equipment that pays for itself in eighteen months. Marketing with a documented ROI. A second truck, a second chair, a second location.
Distributions to the owner are also fine. The point of running a profitable business is to actually take some of the money out.
For HVAC and other seasonal trades: build the reserve up through summer, draw it down through the slow months. The target should be the highest in October, lowest in March.
For real estate agents and brokers: lumpy commissions mean reserves should cover at least three months of personal living expenses on top of business fixed costs. The two get blurred a lot in 1099 land.
For salons and barber shops: tight on cash flow if you carry a lot of inventory. Reserves should be modest in dollar terms but tight in months. Three to four months of fixed costs is usually right.
A DFW barber shop owner has $180K sitting in business checking. Fixed monthly costs are $22K. That’s about eight months of runway. Comfortable, maybe overkill.
The right move isn’t to spend the extra. It’s to slice it: $90K stays in operating reserves, moves to a high-yield savings account earning a few percent. $40K goes into a SEP-IRA contribution before year-end (deductible, lowers her tax bill, builds her retirement). $50K goes to her personally as a distribution she’s been deferring for two years.
Same business, same risk profile, dramatically more efficient deployment of the same cash.
Pull your bank balance. Calculate one month of fixed operating expenses (not all expenses, fixed only). Divide the balance by that monthly number. That’s your runway in months.
If it’s under three, the priority is building it. If it’s over twelve, the priority is deploying it.
If it’s somewhere in between and you’re not sure whether it’s the right number for your industry and stage, that’s a thirty-minute conversation we have with DFW small business owners regularly.
We help business owners get cash reserves to the right level and put the rest to work.
Get in touch with Adam Traywick, and we’ll take a look.
Until next time!
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Adam Traywick CPA small-business accounting firm. He has over 20 years of experience helping small business owners across home-services trades, hair salons, real estate, and insurance agencies optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
