How Long Could Your Business Survive on Cash Reserves?

What are cash reserves?

Cash reserves are the total amount of cash a business can quickly access to pay expenses if necessary. Analysts measure a business’s staying power by how many days it could stay in business if all revenue stopped temporarily. 

Cash reserves include all cash you can access within a short period, including the following:

• Checking and savings accounts
• Money market funds
• Short-term certificates of deposit (CDs)
• Short-term Treasury bills

How long can businesses survive on cash reserves?

To calculate how long a business can survive on cash reserves, follow this formula:

Total Cash Reserves ÷ Average Daily Expenses = Number of Days

However, if your business must survive without revenue, your cash reserve amount isn’t the only factor at play. Your industry is particularly crucial; it influences numerous business aspects, including the operation’s necessary facilities and the number of employees needed to conduct operations. 

More volatile industries tend to keep more cash reserves to compensate for anticipated revenue cycles than businesses with daily sales. For example, an average restaurant may only have cash reserves to last a couple of weeks. In contrast, manufacturing companies average over a month in cash reserves.

Consider the following list of how long businesses in various industries can survive on average without bringing in revenue: 

• Restaurants: 16 days
• Repair and maintenance: 18 days
• Retail: 19 days
• Construction: 20 days
• Personal services: 21 days
• Wholesalers: 23 days
• Metal and machinery: 28 days
• Healthcare services: 30 days
• High-tech manufacturing: 32 days
• High-tech services: 33 days
• Other professional services: 33 days
• Real estate: 47 days

How much should businesses have in cash reserves?

There’s no set amount of cash reserves or number of days your business should be able to survive without revenue. While it’s interesting to know the average length of time other businesses can survive, it’s not that much help — especially if those other businesses have a high rate of failure. Devising an excellent cash flow strategy for your unique business is the only way you can determine your optimum amount to keep in cash reserves.

The best accounting software platforms include features to help you manage cash flow and

determine how much cash is required to keep your business afloat. (Read our QuickBooks Online review to learn about a top solution with excellent cash flow management features.) Add-on software programs can also help you analyze cash flow. If you’re proficient with a spreadsheet, you may be able to plan cash flow for a small business on your own and determine how much cash reserves you need.

Keeping sufficient cash reserves is vital to your business’s survival. If you need help, consider seeking professional advice from a small business accountant or other financial expert.

How much should startups have in cash reserves?

Business startup costs and expenses can be high, and revenue can take time to come in. For this reason, many excellent startup businesses with enormous potential fail due to a lack of capital. With just another month or two in cash reserves, they might have made it. 

When starting a business, it’s a good idea to have up to one year’s cash reserve. In some industries, such as construction, even more reserve is appropriate. When you plan cash flow, expect it to take time to build a profitable business.

How can businesses increase their cash reserves? 

Entrepreneurs and small business owners can take the following steps to boost and conserve their cash reserves:

• Keep mandatory expenses low. Try to keep nonnegotiable monthly expenses — expenses you must pay no matter what — as low as possible. For example, in some cases, you may be better off using independent contractors or outsourcing work than hiring employees until you have a reliable income stream.
• Reconsider large cash outlays. To save cash, consider leasing equipment and vehicles or renting property instead of buying it.
• Review insurance coverage. The quickest way to deplete cash reserves is to have too little or insufficient small business insurance when disaster strikes. Ensure you have adequate coverage.
• Create a budget category for contributing to cash reserves. As long as your cash reserves are less than your goal, plan to contribute monthly to savings and other accessible cash.
• Use vendor terms wisely. Ensure you understand your primary vendors’ and suppliers’ payment terms. For example, if you have 30 days to pay, you can improve cash flow by timing your payment when it is due.
• Balance short-term and long-term investments. You don’t want all your investments in short-term cash positions. Long-term investments generally pay a higher return. However, ensure you have sufficient short-term investments that you can access if needed.

Other factors that impact your company’s survival

Consider the following additional factors beyond straight cash reserves and industry that can impact your company’s survival if revenue slows or ceases: 

• Company size: The bigger a business is, the more employees it tends to have — and the more it depends on recurring cash flow. A company with 50 employees needs more cash reserves than a one- or two-person shop.
• Revenue types: Cash flow for restaurants and retail operations can dry up for extended periods, while businesses that deal in consumer staples and contract services can better prepare to handle near-term revenue fluctuations.
• Overhead: A business’s overhead rate — the ratio of overhead costs to revenue-generating activities — is a crucial determinant of its ability to survive. For example, facilities and salaried employees are expensive. Having more of both can make it much more difficult for businesses to survive on cash reserves for an extended period. 
• Minimum monthly expenses: A business’s minimum monthly expenses are a crucial determinant of survival in the event of decreased revenue.
• Margins: Firms with extensive profit margins can often rebuild cash reserves more quickly and recover more easily after a period of little revenue.
• Development stage: Young businesses are often still building revenue and require structuring to last longer on cash reserves. They may also be able to find new investors to help them survive.
• Rate of business growth: Growing your business quickly does not necessarily equate to increased revenue immediately. For example, if you receive a large order, you may need cash reserves to ramp up production long before you get paid.
• Financial resources: Tools to weather a financial storm include investments that can sell quickly and access to a line of credit.
• Adaptability: Some businesses can adapt more quickly and easily to lower revenue than others, helping them better survive a financial crisis. 

Why staying power matters

Your company’s staying power has always been important, but it’s critical for small businesses living in uncertain times. Businesses must worry about and contend with global conflicts, various types of inflation, an uber-competitive labor market and ever-evolving competition from global behemoths. However, if you carefully plan cash flow along with other business strategies, you have a better chance of surviving lean times, succeeding and reaching your business goals.

Dock David Treece contributed to this article.