Cash reserves and treasury reporting: how much to hold and how to watch it

Many owners say they want a cushion, but that is not a decision. A reserve policy states how much cash to hold, in what form, and what triggers action. For example: hold at least three months of fixed costs; if cash falls below that, pause discretionary spending and review the forecast; if it rises above six months, decide what to do with the excess.

Base the target on how predictable your revenue is and how quickly you could cut costs. A business with steady monthly contracts needs less than one with a few large irregular sales.

A treasury view puts the things that determine your liquidity in one place: cash by account, the balances of debt and lines of credit with available capacity, upcoming large payments such as taxes and loan installments, and expected collections. Add the cash forecast for the next thirteen weeks. Update it weekly.

If one customer provides a large share of revenue, losing them can threaten the business. Measure the share of revenue from your top one, top three, and top ten customers each quarter. There is no universal limit, but a single customer above roughly a quarter of revenue deserves a plan: a longer contract, more customers, or a bigger cushion.

The same applies to suppliers. If one vendor supplies something you cannot easily replace, a price rise or failure hurts. Note which suppliers are hard to replace, and look for a second source where it is practical.

Revisit the reserve and the concentration measures each quarter. Growth, a new loan, or a change in seasonality changes both the right level and the risks.

A company has fixed costs of $42,000 a month: payroll, rent, software, insurance, and loan payments. Its policy is to hold at least three months, which is $126,000, and to review any balance above six months, which is $252,000. If cash is $110,000, it sits $16,000 under the floor. The policy says what happens next: pause discretionary spending, refresh the forecast, and decide whether a collections push or a short-term line of credit is the better way to close the gap.

Write the rule down with the person who owns each action. A reserve that nobody is responsible for tends to disappear without anyone deciding it should.