‘How much cash should I keep in the business?’ is one of the most common questions we get from owners, and one of the most commonly answered badly — usually with a single generic number that ignores how different one business is from the next.
We use a floor-plus-buffer model instead. It’s simple enough to apply this week, and specific enough to actually mean something for your business.
Why a single ‘rule of thumb’ number doesn’t work
Generic advice (‘keep three months of expenses’ or ‘six months of revenue’) ignores the two things that actually determine how much reserve you need: how predictable your cash flow is, and how exposed your industry is to sudden shocks.
An asset-heavy logistics business with equipment, fuel costs, and physical premises has a very different risk profile to a professional services firm with low fixed costs and flexible staffing. Applying the same reserve rule to both is why generic advice so often feels wrong for your specific business.
The floor-plus-buffer framework
Step 1: Establish your floor
Your floor is the absolute minimum cash balance the business should never drop below — a number so important it’s treated as untouchable, not something dipped into for a good opportunity or a slow month.
To set it, calculate: fixed monthly costs (rent, wages, loan repayments, insurance) multiplied by the number of months you want as an absolute minimum runway (commonly 2–4 months, depending on industry volatility). This is your floor. It doesn’t move for anything short of a genuine crisis.
Step 2: Build the buffer on top
The buffer sits above the floor and absorbs normal, expected fluctuations — seasonal slow periods, a late-paying client, an unplanned repair. This is typically an additional 1–3 months of fixed costs, depending on how lumpy your revenue naturally is.
Floor + buffer = your total working capital target. For many established 7-figure service businesses, this lands somewhere in the range of 4–8 months of fixed costs total — but the right number for you comes from your own numbers, not this range.
Step 3: Set an early-warning threshold
Rather than waiting until you’re at the floor to react, set a trigger point — for example, when the buffer drops to 50% — that prompts a proactive conversation about what’s changed and what to do about it. This turns cash management from a crisis response into an early-warning system.
What the war chest is (and isn’t) for
The war chest exists to fund operational disruption — a fire, a cyber incident, a major client loss, an unexpected relocation. It is not:
- A personal wealth-building account. Cash above your floor-plus-buffer target should be actively deployed — either reinvested in the business deliberately, or extracted into personal wealth-building, not left idle indefinitely.
- A substitute for insurance. The war chest and proper business insurance are complementary, not either/or. Insurance covers the catastrophic, low-probability events; the war chest covers the smaller, more frequent disruptions that don’t warrant a claim.
Reviewing your numbers as the business changes
Your floor and buffer aren’t a set-and-forget calculation. Revisit them annually alongside your broader financial review, after any material change in fixed costs, and after any period that tested your reserves.
FAQ
Is there a standard percentage every business should use?
No — the right reserve depends heavily on your industry’s volatility and how predictable your revenue is. A floor-plus-buffer approach based on your own fixed costs is more reliable than a generic industry rule.
Should the war chest be in a separate account?
Many owners find it easier to hold reserves in a clearly separated account so it’s visible and isn’t accidentally spent as part of day-to-day cash flow.
What happens to cash above the buffer target?
It shouldn’t just sit there. That’s the point where it’s worth having a deliberate conversation about reinvestment in the business versus extracting it into personal wealth-building.
How does this interact with insurance?
The war chest and insurance cover different types of risk — the war chest for smaller, more frequent disruptions, insurance for the larger, catastrophic ones.
What’s a realistic timeframe to build up to the target?
This varies by business, but building the floor first (the non-negotiable minimum) before working toward the full buffer target is a reasonable sequence if you’re starting from a lower base.
