Business owners usually assume more is always better, but idle cash has a real, ongoing cost that often goes unnoticed. In our below blog post, we have drawn up a simple framework to help you get the number right. 

The right amount of cash is the amount that covers your operational needs, with a sensible buffer for the unexpected. Everything above that is not a reserve, it is capital which is not pulling weight.  

The number you need 

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 business going: wages, rent, insurance, utilities, suppliers. 

Research from JP Morgan has found that the average medium-sized business runs on just 27 days of cash reserve. That is consistent with what we see with many of our clients, which means the two-to-six-month range is far from an aggressive target. 

The right number within that range depends 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, or seasonal patterns 

• Payment behaviour is variable, or you rely on a small number of large clients 

• You do not have a credit line as backup 

• You have significant fixed costs, particularly payroll, that do not flex quickly if income dips 

The role of forecasting 

Whether or not your business has a meaningful forecasting process makes a significant difference to how much cash you need to hold. 

A business that actively tracks expected receipts, known outgoings, and emerging gaps has an early warning system. If a shortfall is coming, they can see it three months out and act, chasing debtors earlier, delaying a discretionary purchase, or drawing on a credit line in an orderly way. That visibility reduces how much you need to hold as a precaution. 

A business without a forecasting process is flying blind. When a cash squeeze arrives, it is already a problem, and the only defence is having enough cash on hand that it does not matter, which means holding more of it. 

The practical implication is the better your financial visibility, the leaner you can run your reserves. Even a basic monthly cash flow spreadsheet has real value as it directly reduces the amount of idle cash you need to carry. 

A note on sole traders and micro businesses 

Most of the above applies to businesses with teams, premises, and a meaningful fixed cost base. For a one-or-two-person business, the picture is different. Overheads are typically low, costs are easier to control, and the ability to flex quickly is far greater. 

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. 

Keep your tax money separately 

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 not appropriate or advised.  

Set up a separate savings account and pay your estimated tax liabilities into it as you go. Treat it like a direct debit you cannot cancel. Once you have done that, your operating cash reserve calculation should be based on your actual operating expenses net of tax obligations already set aside. 

The hidden cost of too much cash 

A current account pays 2-3% at best. Your cost of capital, the return your business and its owners could reasonably expect from that money, is almost certainly higher. The gap between those two numbers, multiplied by however much cash you are sitting on, is what excess reserves cost you each year. It is not dramatic week to week, but over the years, it is significant. 

What to do with cash above your reserve 

If your balance is consistently above your overhead buffer plus your tax pot, you have a structural surplus. That is a good problem to have, but it needs a decision. 

• 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 more. 

• Build a deliberate opportunity fund. If a planned acquisition or large investment is on the horizon, holding extra cash makes sense, but it should be a conscious decision with a clear purpose and timeline. 

• Return it to the owners. Money in the hands of the owners, deployed deliberately, will almost always outperform money sitting in a business account. Even cash earning 4-5% on a platform like Insignis is likely underperforming what that capital could achieve if extracted and invested with intention. 

Cash should not accumulate by default. It should have a job. 

A simple framework 

• Calculate your monthly overheads: the total cost of running the business, excluding tax provisions. 

• Determine your range: two to three months for stable income; four to six months if receipts are lumpy or unpredictable. 

• Adjust for forecasting: good financial visibility means you can sit towards the lower end. If you are flying without instruments, hold more. 

• Add your ring-fenced tax pot: kept entirely separately from your operating reserve. 

• That total is your target. Anything consistently above it deserves a conversation about where it goes next. 

Review this number at least annually, or whenever the business changes materially. 

What to do with surplus cash 

If you still have cash above your target level, it needs a better home than a current account. Multi-bank cash management platforms such as Insignis Cash, Flagstone, and Raisin UK allow you to spread funds across multiple institutions, access rates typically in the 4-5% AER range, and manage everything through a single login, with one tax certificate at year end. 

Keeping cash in the business feels safe. But there is a version of “safe” that quietly costs you money every month. The goal is not to run uncomfortably lean, it is to be deliberately funded, with a clear rationale for every pound you are holding. 

At PennyBooks, we are committed to helping you understand every aspect of your business’s finances; what can and can’t be done, and how to plan confidently for the future. If you have any questions or would like to find out more, please contact us at support@pennybooks.io. 

Sarah Morris