Should I hold it in a separate account?

Most owners who do it successfully do. Money that is visible in the main balance tends to get spent on something that felt urgent at the time.

Is it better to pay down debt or build a buffer?

Usually some buffer first — debt with no cash means one bad month forces a worse decision. Beyond that it depends on the rate and your situation.

What if I have never had a reserve?

Start with one month and build. A small buffer changes decisions immediately; waiting until you can do it properly usually means never starting.

← Answers

How much cash should I keep in the business?

Enough to cover fixed costs and payroll through your worst realistic month — commonly two to three months. And remember part of any balance is not yours: it holds the sales tax you collected and the deductions withheld from payroll, neither of which is spendable.

Work from your own numbers, not a rule

Add up what leaves regardless of whether you win work: wages, rent, insurance, loan payments, subscriptions. Multiply by how long a bad stretch has actually lasted for you before. That figure is yours; someone else's three-month rule is not.

Subtract what you owe before you decide you have it

An owner who thinks he has forty thousand and actually has twenty-two after remittances is not being cautious, he is mistaken. Take the tax and deductions out of the number before you plan anything with it.

What the buffer actually buys

The ability to say no. To refuse a job priced below cost, to walk away from a customer who treats your crew badly, to keep someone on through a quiet winter. Thin cash removes all of those choices, and the pressure always lands on the people with the least say.

Cash and profit are different problems

A profitable business can run out of money if customers pay slowly, and an unprofitable one can look fine while a big deposit sits in the account. Know which one you have, because the fixes are opposite.

Also asked

Should I hold it in a separate account?: Most owners who do it successfully do. Money that is visible in the main balance tends to get spent on something that felt urgent at the time.
Is it better to pay down debt or build a buffer?: Usually some buffer first — debt with no cash means one bad month forces a worse decision. Beyond that it depends on the rate and your situation.
What if I have never had a reserve?: Start with one month and build. A small buffer changes decisions immediately; waiting until you can do it properly usually means never starting.

Written for your trade

This is the kind of thing Solomon works through with owners using their own numbers. See how it works →