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An illustration represents how a cash reserve can help your business respond to unexpected expenses.
Cash flow

What is a cash reserve? A business guide

What is a cash reserve?

A cash reserve is a business’s emergency fund. It includes money that you’ve intentionally set aside for unexpected expenses and is immediately accessible to you when things get tight.

Most business owners will quickly admit that things don’t always go according to plan. 

One minute, everything is clear blue skies, and the next, an unforeseen circumstance knocks you over like a hurricane.

Whether a crucial piece of equipment breaks down or there’s a sudden lull in sales, a cash reserve can provide relief when unexpected expenses threaten your cash flow.

So how do cash reserves work, and how can you build one yourself?

To find out, follow this small business guide to learn everything you need to know about cash reserves.

How cash reserves work

A graphic showcases the definition of a cash reserve.

While the term “cash reserves” might make you picture piles of bills tucked into a savings account or under your mattress, your cash reserve account doesn’t need to be only cash.

You may also add short-term, liquid investments like money market funds or liquid assets you can easily convert into cash to your cash reserve.

Cash reserves are important because they can help you protect yourself by providing you with cash if unexpected expenses arise or revenue drops. An emergency fund can help you cover expenses without needing a loan or stacking up credit card debt.

As much as you like to think that your cash flow is stable and predictable, plenty of surprises can come from left field. To help you better understand cash reserves, let’s look at how cash reserves can differ for small businesses, banks, and individuals.

For small businesses

As a general rule of thumb, small business owners should have three to six months of operating expenses to help prepare for any emergencies. That way, you have funds to weather the storm if unforeseen circumstances affect your business.


According to Wave, 57% of small business owners have less than $5,000 saved for emergencies.

On top of this, a small business may use its cash reserves as liquid funds to help finance investment opportunities. Because cash has high liquidity, many businesses may use it to build their cash reserves rather than other assets with low liquidity, like long-term bonds. In addition, a cash reserve may consist of other short-term assets, such as three-month Treasury bills.

For banks

Banks may also have cash reserves, which the US Federal Reserve mandates cash amount requirements for. As of March 15, 2020, the Board of Governors of the Federal Reserve System reduced the cash reserve requirement to 0%.

Because of this, there are currently no specific requirements for the amount of money banks must keep in a cash reserve.

For individuals

Like small businesses and banks, individuals may also want to build cash holdings to ensure they’re readily prepared for emergencies. Generally speaking, individuals should have enough money in their cash reserves to cover three to six months of living expenses.


According to Bankrate, 36% of Americans have more credit card debt than emergency savings.

An individual may choose to keep their cash reserve in a combination of the following places: 

  • Checking account.
  • Savings account.
  • Money market fund.
  • Money market account.
  • Treasury bills.
  • Certificates of Deposit.

By keeping your cash reserve somewhere easily accessible, you can be better prepared for any surprise expenses or financial emergencies.

Pros and cons of cash reserves

Whether you’re a small business owner or an individual worried about your finances, building a cash reserve can help provide you with financial peace of mind. Not only that, but it can provide you with funds to help pursue any business growth or expansion opportunities as they arise. Additionally, having a cash reserve can help you maintain a positive cash flow and reduce the need for loans.

But cash reserves also come with downsides. For example, any cash held in a cash reserve could generate higher returns elsewhere. Whether that money is instead reinvested into the business or used for other long-term investments such as stocks, hoarding too much money in a cash reserve could lead to missed opportunities. How much you keep in reserves should be dependent on your financial goals and risk tolerance.

How much should you keep in your business cash reserve?

A graphic showcases three questions to ask yourself when starting a cash reserve.

You should have enough cash in short-term investments or a checking or savings account to access on a rainy day. At a bare minimum, your cash reserves should cover your expenses for the amount of time you decide on, whether a few months or half a year.

Take a look at your monthly cash flow statement and other financial statements to grasp how much your business spends each month. If your business stops bringing money in, your emergency fund needs to be able to cover your expenses until you’re earning income again. 

In addition, your reserve funds don’t just need to sustain your business if something happens tomorrow—they need to keep you afloat if something happens next year. Or the year after.

That’s why you need to also think longer term and account for the future of your business. Are you growing rapidly? Are you hiring new employees? Remember that growing businesses generally require more cash on hand, so you’ll want to track your expenses and build them into your cash reserves. 

Liquidity is also important to consider here. When you’re experiencing a cash shortage, time generally isn’t on your side. Only count things in your cash reserves if you know you can get the money quickly. Long-term investments, for example, shouldn’t be factored into your liquid reserves.

How to create a cash reserve 

If your eyes grew wide at the thought of saving money for up to six months of expenses, we don’t blame you. It’s tough to set money aside as a business owner. Now that you have a handle on the total amount you need, let’s discuss some strategies to build up your cash reserve funds.

1. Set a monthly savings goal 

Trying to save a huge amount of money overnight feels overwhelming. You won’t stock your emergency fund in one swoop, but you can make this process more manageable by setting a smaller monthly goal for yourself.

Do you want to set aside a certain percentage of your profits each month? Or do you want to set a monthly dollar amount to target?

Breaking down your desired cash reserve business goal this way is far less intimidating, and you’ll feel motivated to keep going when you see the number growing in your savings account. 

2. Select a dedicated bank account 

Once you’ve set a monthly savings goal, you may want to set up a dedicated small business checking account for your cash reserve fund. That way, you can easily separate your cash reserve from other funds without having to worry about monthly fees. Keep in mind that this may require extra bookkeeping hours and effort if you use manual accounting methods.

A cash reserve isn't always just money in a checking or savings account. Some businesses may also supplement their cash reserves with three-month Treasury bills or other short-term assets.

No matter what your cash reserve consists of, keeping it separated from the rest of your money can help you reduce the temptation to spend it. With a QuickBooks Checking account, earn APY on savings you set aside in envelopes that are tailored to your goals—from a rainy day fund to equipment. 

3. Treat your cash reserves as nonnegotiable

Would you not pay your employees? Or skip your electric bill? We didn’t think so. These fixed expenses are part of your business budget, and your cash reserves should be too.

Until you’ve stocked your emergency fund with enough cash, treat it as a fixed expense. This will keep you accountable for filling it up rather than treating it as something to do when you feel you have extra money to throw at it. 

If you find it challenging to keep track of your budget, using software to automate your savings or trying techniques like envelope budgeting may help you build your emergency fund. 

In addition, you’ll also want to prioritize replenishing your cash reserve whenever you take money out. That way, you’re still prepared if other unexpected expenses arise.

When to use your cash reserve

Now that you have a cash reserve set up, you may wonder when exactly you should use it. Remember that a cash reserve isn't something you should be using to cover your regular expenses. Instead, these funds should be reserved for emergencies and unexpected expenses.

Examples of when you should use your cash reserve include:

  • Surprise expenses: Whether it's to help cover the cost of damaged property due to a natural disaster or an emergency equipment repair, a cash reserve can provide quick financial relief for any surprise expenses.
  • Slow sales months: Depending on your business, you may face seasonal sales highs and lows. If you’re ever having a slow sales month and can’t cover your expenses, you may want to consider dipping into your cash reserve.
  • Growth opportunities: If you ever find yourself in a situation where you have an opportunity to grow your business, your cash reserve may be able to help. For example, you land a deal with a new customer and need extra materials to keep up with demand. You may use your cash reserve to help cover the new costs.
  • New acquisitions: From new and improved equipment to tools that can help improve your small business’s processes, you may turn to your cash reserve to help cover these costs.
  • Three-paycheck months: If you pay your employees biweekly, there are two months of the year when your small business covers three pay periods instead of two. For some businesses, this payroll schedule can be financially straining. Fortunately, you can pull from your cash reserve to help cover these costs. 

Ensure you aren’t using your cash reserves unnecessarily by creating guidelines for when you’ll use it, such as emergencies or if your monthly cash flow is negative.

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How to show your cash reserve on company accounts

As money flows in and out of your cash reserve, you’ll want to be sure that you’re accurately recording it in your books.

You can record a deposit to your cash reserve with the following journal entry:

Now let’s say that you’re withdrawing money out of your cash reserve to cover a paycheck during a three-paycheck month. You can record a withdrawal from your cash reserve with the following journal entry:

Whether you’re funding or spending your cash reserve, always keep your books up to date so you have an accurate picture of your cash reserve at all times.

Next steps for managing your cash flow

We all know the sentiment about saving for a rainy day. And unfortunately, weather forecasts aren’t always accurate—meaning a downpour can spring up when you were expecting nothing but sunshine. Fortunately, setting money aside in a cash reserve can help protect you from an unexpected storm.

Cash reserve FAQ

QuickBooks Checking account: Banking services provided by and the QuickBooks Visa® Debit Card is issued by Green Dot Bank, Member FDIC, pursuant to license from Visa U.S.A., Inc. Visa is a registered trademark of Visa International Service Association. Green Dot Bank operates under the following registered trade names: GoBank, GO2bank and Bonneville Bank. Registered trade names are used by, and refer to, a single FDIC-insured bank, Green Dot Bank. Deposits under any of these trade names are deposits with Green Dot Bank and are aggregated for deposit insurance coverage up to the allowable limits. Green Dot is a registered trademark of Green Dot Corporation. ©2022 Green Dot Corporation. All rights reserved. QuickBooks products and services, including Instant Deposit, QuickBooks Payments, Cash flow planning / forecasting are not provided by Green Dot Bank.

Envelopes: You can create up to 9 Envelopes within your primary QuickBooks Checking account. Money in Envelopes must be moved to the available balance in your primary QuickBooks Checking account before it can be used. Envelopes within your primary QuickBooks Checking account will automatically earn interest once created. At the close of each statement cycle, the interest earned on funds in your Envelopes will be credited to each Envelope in proportion to the average daily balance of each Envelope. See Deposit Account Agreement for terms and conditions.

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