5 questions to ask to find the right cash reserve and growth balance for your business

Richard Testa, Senior Vice President, Market Executive, New England North

Most businesses should aim to keep three to six months of operating expenses in accessible cash reserves, with remaining funds directed toward growth investments. However, the right balance depends on your near-term plans, competitive position and risk exposure. Holding too little cash can make it difficult to meet obligations, while holding too much can mean missed growth opportunities and idle capital. Richard Testa, Senior Vice President and Market Executive, New England North at Citizens, recommends evaluating five key factors to determine the right balance between maintaining liquidity and investing in your business's future.

Running a successful business requires balancing spending versus saving to invest in growth while keeping enough cash on hand to stay competitive, cover operating expenses and handle unexpected disruptions.

Most businesses try to keep three to six months of operating expenses in accessible cash reserves and put remaining funds back into the company to support growth. The right spending versus savings mix depends on your business plans and circumstances, and it changes over time. In a recent Citizens survey, 45% of business owners said they expect their use of business credit to increase, and 75% expect revenue growth over the next year.¹ Shifts in indicators like these have direct implications for how much cash to keep accessible versus put to work.

Holding too little cash can make it impossible to meet financial obligations. Holding too much can mean missed opportunities and money that is not working hard enough for your business. The right balance will shift as your business grows, your goals evolve and the market changes.

The five questions below can help you find and maintain a balance.

1. What is your current cash-to-investment balance?

The warning signs of having too little cash on hand are easy to recognize. Difficulty making payments on time, having to postpone needed purchases or feeling squeezed every time an unexpected expense arrives are all signals that cash reserves may be running low. Knowing whether you are holding more cash than your business needs can be harder to gauge.

I tell businesses that a practical starting point is to calculate three to six months of your operating expenses. That figure is your target reserve range. Whatever exceeds that figure can be reinvested in your business or moved into a higher-yield savings vehicle. It is also worth examining whether the cash you are holding is working as hard as it can. Keeping reserves in a money market account or longer-term savings account where they can earn interest is a step many business owners overlook.

Talking with a business banker can help you assess whether your current cash balance is serving your business well and identify opportunities you may be missing. Fifty-seven percent of midsize businesses are actively working to improve their cash flow management, which reflects how central this balance is to running a healthy business. ²

2. What do your financial ratios tell you?

Understanding a few key financial ratios can reveal whether your cash is working as hard as it should be. A good starting point is reviewing your business financial statements.

These ratios can also help inform decisions about when to spend and when to save.

• Quick ratio. This measures your ability to meet short-term obligations with your most liquid assets. To compute it, divide your current assets minus inventory by your current liabilities. It is one of the clearest ways to gauge whether your business can meet its short-term obligations.
• Inventory days on hand. This shows how efficiently your business frees up cash tied up in inventory. Calculate it by dividing your average inventory for a given period by the corresponding cost of goods sold for the same period, then multiply the result by 365. A high number may indicate cash is sitting idle in unsold product.
• Accounts receivable turnover ratio. This measures how effectively your business collects money it is owed. Divide credit sales by the average accounts receivable value for the same period. A low ratio can signal that your collections process needs attention.

Talk with your accountant or business banker to understand what these ratios reveal about your spending and saving decisions.

3. How do near-term plans affect your budget needs?

Company initiatives will impact how you balance spending and saving. If you are planning to roll out a new product or service, for example, you need a line item in its budget for testing and marketing as well as savings to support that effort. Citizens research reveals that 52% of small and midsize businesses (SMBs) expecting revenue growth are launching new products or services, underscoring how closely growth plans and saving are connected.²

If plans hinge on outside financing, saving may also take priority since having strong working capital is something lenders look for. Positive working capital indicates to lenders that your business has the healthy finances it needs to repay its debt even if cash flow shifts.

I frequently remind business owners that if you have funds tied up in growth investments, you may not have the cash on hand that lenders are looking for. Shoring up your cash position before you apply for financing, as early as possible, gives you more options. And, you’ll be glad to have them if you need financing quickly.

Having strong cash reserves may also help you to capture discounts on bulk inventory purchases and extend terms for accounts receivable.

4. How competitive is your business?

If you are falling behind in what you offer or how much you can produce, some strategic spending may take precedence over saving. Keeping up with technology helps you operate efficiently and stay competitive. It also helps you adapt as your business grows. Sixty-one percent of business owners in a Citizens survey say they plan to spend more on technology in 2026, and close to 30% plan to spend more on facilities and equipment. ¹

People are just as important as technology and equipment when it comes to staying competitive. The right staff can make a big difference in what your business is able to do and how well it performs. In the same survey, 49% of businesses plan to increase full-time headcount, 22% plan to increase part-time headcount and 29% plan to add contract staff.

For a broader look at how to make your business more competitive, see how to grow your business.

5. How much should you keep in a business emergency fund?

Balance the advice to set aside three to six months of operating expenses with your company's need to fund strategic priorities and plan for unexpected expenses. The right amount will change with your business circumstances. A practical way to figure out how much to set aside is to make a list of events that could hurt your business, assign a dollar value to each and weigh those values by the likelihood they will occur. For example, if a key piece of machinery would cost $8,000 to replace, and you estimate a 25% chance it will need replacing this year, setting aside $2,000 toward that risk is a reasonable starting point for your emergency fund calculation. For a service business, the same logic applies to different risks. If losing a key client would cost $50,000 in annual revenue, and you estimate a 20% chance of that happening, setting aside $10,000 toward that risk is a reasonable starting point. Funds in your emergency fund should be in a separate, easily accessible savings account, such as a money market account.

I like to remind business owners that two key success factors to creating and sustaining a reserve fund are to contribute to it as much as you can and to keep the funds untouched. The discipline of treating your reserve as off-limits is what makes it useful when you actually need it.

Getting started on your spending vs. saving plan

Answering these five questions can provide a strong foundation for a conversation with your business banker or financial advisor. Your answers may be the first step in building a financial plan that balances short-term financial needs with the long-term goals your business needs to grow.

Get in touch with a business banking professional at Citizens about your spending versus savings plan.

Cash Management Tools

Frequently asked questions

How much cash should a small business keep on hand?

Conventional wisdom is to keep three to six months of operating expenses in a separate, easily accessible account such as a money market account. However, the right amount depends on your business type, how long you have been established and your specific risk exposure. You can estimate your target by listing potential disruptions, assigning a dollar value to each and factoring in how likely each one is to occur.

How do I know if my business is holding too much cash?

Reviewing key financial ratios, including your quick ratio, inventory days on hand and accounts receivable turnover, can reveal whether cash is sitting idle that could be working harder for your business. Comparing your ratios to industry benchmarks through resources such as Bizminer or the RMA’s Annual Statement Studies can also help. A business banker can also help you interpret what the numbers mean for your specific situation.

Should I build cash reserves before applying for a business loan?

Yes. Lenders will evaluate your cash flow and liquidity when reviewing a loan application, and if your funds are tied up in growth investments, you may not have the liquidity they are looking for. Building up your cash position before you apply may improve your chances of approval and give you more options in the process.

When should I prioritize investing in my business over saving?

If your business is lagging behind competitors in technology, offerings or production volume, strategic investment may be necessary to remain competitive. Investments in technology, equipment and the right staff can pay back substantially in the near term and over the long term. The key is to maintain enough cash reserves to cover three to six months of operating expenses while directing excess cash toward growth.