Our job as your accountants goes beyond filing returns, it’s to help you make better decisions with your money. One question most business owners rarely stop to ask is how much cash their business should actually be holding. It’s easy to assume more is always better, but idle cash has a real, ongoing cost that often goes unnoticed. This article gives you a simple framework for getting the number right.
Most business owners keep too much cash in their company. Not because they’re careless, quite the opposite. It feels prudent. It feels safe. But idle cash in a business account isn’t a neutral, conservative choice. It has a real, ongoing cost.
This post is about finding the right number: enough to run your business with confidence, not so much that your money stops working for you.
Start with the right question
The question isn’t “how much cash do we have?” It’s “how much cash do we actually need?”
Those are very different questions. The first is descriptive. The second is a discipline and most businesses never apply it rigorously.
The right amount of cash for your business is the amount that covers your operational needs, with a sensible buffer for the unexpected. Everything above that number isn’t a reserve. It’s capital that isn’t pulling its weight.
The number you need: it depends on your business
The widely accepted benchmark among CFOs and finance advisors is two to six months of operating expenses held as a cash reserve. Not turnover, overheads. The money it costs to keep the lights on such as wages, rent, insurance, subscriptions, utilities, suppliers.
To put that in context: research from JP Morgan found that the average medium-sized business runs on just 27 days of cash reserve, less than one month. That’s consistent with what we see across many of our clients. It means the two-to-six-month range isn’t an aggressive target. For most businesses, simply reaching it would be a significant improvement.
But the right number within that range varies considerably depending on two things: how predictable your income is, and how well you can see it coming.
Two to three months is appropriate where:
- Revenue is reliable and comes in smoothly month to month
- Customers pay promptly and consistently
- You have an undrawn credit facility you could access quickly if needed
Four to six months is more appropriate where:
- Cash receipts are lumpy, large invoices, project-based billing, seasonal patterns, or contracts that pay on completion
- Customer payment behaviour is variable, or you have a small number of large clients whose timing you can’t fully control
- You don’t have a credit line as backup
- You have significant fixed costs, particularly payroll, that don’t flex downward quickly if income dips
The logic is straightforward. If your income arrives in a smooth, predictable flow, your cash reserve only needs to bridge relatively short timing gaps. But if £80,000 lands in one month and nothing arrives for the next six weeks, your business needs to absorb that without strain, and a bigger buffer is what makes that possible without panic.
The role of forecasting
One of the most important and most overlooked factors in determining how much cash to hold is whether the business has a meaningful forecasting process.
A business that actively forecasts its cash position, tracking expected receipts, known outgoings, and emerging gaps, effectively has an early warning system. If a shortfall is coming, they can see it three months out and act: chase debtors earlier, delay a discretionary purchase, or draw on a credit line in an orderly way.
That visibility reduces the amount of reserve you need to hold as a precaution, because you’re not relying on the buffer to absorb surprises you never saw coming.
A business without a forecasting process is flying blind. When a cash squeeze arrives, it’s already a problem and the only defence is to have enough cash on hand that it doesn’t matter, which means holding more of it.
The practical implication: the better your financial visibility, the leaner you can afford to run your cash reserves. Investing in a simple monthly cash flow forecast even a basic spreadsheet is not just good financial practice. It directly reduces the amount of idle cash you need to carry, and that has a real value.
A note on sole traders and micro businesses
Most of the guidance above applies to businesses with meaningful overhead structures: teams, premises, supplier commitments, and a fixed cost base that comes with scale.
For a one- or two-person business, the picture is quite different. Overheads are typically low, the owner has direct control over almost every cost, and the ability to flex quickly is far greater than in a larger organisation. That nimbleness is genuinely valuable, and it means the cash reserve requirement is inherently lower.
For most sole traders and micro businesses, one to two months of actual business costs is a more appropriate target, with the emphasis shifting towards personal financial resilience rather than a large business cash buffer.
The questions worth asking are: what are my fixed, unavoidable business costs each month, and how long could I comfortably cover those if work dried up?
Keep your tax money separately
One important discipline before anything else: your VAT, corporation tax, and PAYE obligations are not your money. They belong to HMRC. Mixing them with your operating cash is a recipe for a nasty surprise.
Set up a separate savings account and pay your estimated tax liabilities into it as you go. Treat it like a direct debit you can’t cancel. When the bill arrives, the money is already there. This one habit removes a huge amount of financial stress and prevents businesses from inadvertently spending money that was never really theirs.
Once you’ve done that, your operating cash reserve calculation should be based on your actual operating expenses net of tax obligations you’ve already set aside.
The hidden cost of too much cash
Here’s what most business owners don’t think about: excess cash in a business account has a real cost.
A current account might pay 2–3% at best. Your cost of capital the return your business and its owners could reasonably expect to make from that money is almost certainly higher. The gap between those two numbers, multiplied by however much cash you’re sitting on, is what excess cash reserves cost you annually. It’s not dramatic in any given week. Over years, it’s significant.
What to do with cash above your reserve
If your cash balance is consistently sitting above your two-to-six-month overhead buffer (plus your tax pot), you have a structural surplus. That’s a good problem to have but it still needs a decision.
The options are broadly:
Reinvest in the business. Is there equipment, technology, people, or marketing that would generate a return? Cash sitting idle earns very little. Capital invested in a good business earns considerably more.
Build a deliberate opportunity fund. Some businesses have a legitimate reason to hold cash above their operating reserve a planned acquisition, a large contract requiring upfront investment, or simply keeping powder dry where buying opportunities may arise. That’s a sensible decision, but it should be a conscious one. The cash should have a purpose and a rough horizon. That’s very different from cash that has simply drifted upward over time with no plan attached.
Return it to the owners. If there’s no compelling use for the capital inside the business, it should be working harder outside it. Whether that’s paying down personal debt, investing, or building personal financial resilience money in the hands of the owners, deployed deliberately, will almost always outperform money sitting in a business account.
It’s worth being clear: even if that surplus cash is sitting in a well-run platform like Insignis earning 4–5%, it is still likely underperforming what the same capital could achieve if extracted and deployed with intention. The platform solves an admin problem and improves on a current account. It doesn’t solve the fundamental question of whether the money should be there at all.
The key word in all of this is deliberate. Cash shouldn’t accumulate by default. It should have a job.
A simple framework
- Calculate your monthly overheads: the total cost of running the business for one month, excluding any tax provisions.
- Determine your range: two to three months for stable, predictable income; four to six months if receipts are lumpy or unpredictable.
- Adjust for forecasting: if you have a reliable cash flow forecast and good financial visibility, sit towards the lower end. If you’re flying without instruments, hold more.
- Add your ring-fenced tax pot: this sits entirely separately from your operating reserve.
- That total is your target cash level. Anything consistently above it deserves a conversation about where it goes next.
Review this number at least annually, or whenever the business changes materially, new headcount, a significant new contract, a change in payment terms.
What to do with surplus cash: cash management platforms
If your operating reserve is funded, your tax pot is set aside, and you still have cash sitting above those levels, it needs a better home than your business current account.
A category of platform has emerged specifically designed to solve this problem: multi-bank cash management platforms. Instead of you shopping around, opening multiple accounts, and managing paperwork across different banks, the platform does it for you. You complete one application, deposit your funds into a central hub account, and allocate across a range of savings products at different banks all through a single login.
The benefits are threefold: better rates (typically 4–5% AER at current rates), FSCS protection spread across multiple institutions (up to £85,000 per banking group), and dramatically reduced admin, tax certificate at year end, one dashboard, one point of contact.
The main platforms worth knowing about for UK businesses are:
Insignis Cash: Built specifically for businesses, charities, local authorities and trusts. Access to savings products from 50+ banks, ranging from easy-access accounts to five-year fixed-term deposits. Minimum deposit £100,000. Fee of 0.1%–0.25% depending on balance. Notably does not receive payment from the banks on its panel. Over £22 billion placed since 2017.
Flagstone: One of the larger platforms, working with 60+ banks and building societies. Minimum deposit £100,000. Fee (up to 0.3%) is deducted from rates before display, so the rate shown is the rate received. Hub account held with HSBC.
Raisin UK: More consumer-facing but accessible to some business types. Lower minimum deposits and a simpler interface. Worth considering for smaller balances or business owners looking at personal surplus funds alongside business cash.
The bottom line
Keeping cash in the business feels safe. But there’s a version of “safe” that quietly costs you money every month. The goal isn’t to run uncomfortably lean — it’s to be deliberately funded, with a clear rationale for every pound you’re holding.
If you have any questions on this, please don’t hesitate to get in touch with us at support@pennybooks.io.
Sarah Morris
