Financemaidav Basics
Cash Reserves: The Questions Business Owners Should Answer
How much of a buffer a business needs is not settled by a rule of thumb alone, but by a few honest answers. These questions help you decide.
How much money a business should hold as a buffer has no one-size-fits-all answer. Commonly cited rules of thumb offer initial guidance but are no substitute for looking at your own business model. This article shows what a cash reserve is for, which questions determine its size, why a credit line is not a reserve, where the money can be kept and how a rolling 13-week plan keeps you on top of things.
What the reserve is for
A cash reserve is money a business can access at short notice without taking on new debt. It bridges seasonal troughs, late payments by customers and bad debts. It absorbs unexpected costs, such as a repair or an additional tax payment, and buys time for decisions in a crisis. Not least, it allows you to seize opportunities: a favourable purchase, an investment or a hire that cannot wait.
Why a business with a healthy profit can still be short of cash is explained in the article Revenue Is Not Profit. For the size of the reserve, three to six months of fixed costs is often cited. This range is a guide, not a standard. A business with full order books and many regular customers may need less, while a project business with a few large contracts needs considerably more.
The right figure emerges from honest answers to six questions:
- How high are the fixed monthly costs really?
- How much does revenue fluctuate over the year?
- How long do customers take to pay?
- How dependent is the business on a few major customers?
- What large payments fall due during the year?
- How quickly could costs be cut?
Counting fixed costs honestly
The starting point of any calculation is the costs that arise regardless of revenue: rent, salaries including the employer's share of social security contributions, leasing instalments, insurance, software and subscriptions, interest and loan repayments. In sole proprietorships and partnerships, the owner's salary belongs here too, because the owners' household also has to keep running during a weak phase. If you simply take the costs from the profit and loss account, it is easy to overlook loan repayments, which do not appear there as an expense.
The other side of the same question is: how quickly could costs be cut if revenue collapses? Notice periods for leases, staff and service providers determine how long a block of costs remains. A business that buys in many services flexibly can manage with a smaller reserve than one with long contractual commitments.
Revenue, payment terms and major customers
If revenue fluctuates strongly, as in tourism, construction or retail with a pronounced Christmas trade, the reserve has to carry the weak months. It helps to look at monthly revenue over the past two to three years: how far below the average was the weakest quarter, and how long did the recovery take?
How long payment takes is just as important. Weeks often pass between delivery and receipt of payment, and with projects even months. Between businesses in Germany, under section 286 of the German Civil Code (BGB), a debtor is in default at the latest 30 days after the due date and receipt of the invoice, after which default interest of nine percentage points above the base rate applies. Under section 271a, payment terms of more than 60 days are only effective if they have been expressly agreed and are not grossly unfair to the creditor. Legal claims, however, are no substitute for money in the account.
The fourth question concerns dependency. If a large share of revenue comes from two or three customers, the loss of a single client, or a delay in its payments, can open a gap that cannot be closed quickly. The higher the concentration, the larger the buffer should be.
Large payments over the year
Many shortfalls arise not from weak months but from dates that were known and still come as a surprise. In Germany, these include advance payments of income or corporation tax on 10 March, 10 June, 10 September and 10 December, trade tax (Gewerbesteuer) advance payments on 15 February, 15 May, 15 August and 15 November, additional payments after a tax assessment, annual insurance premiums, special loan repayments, and Christmas and holiday bonuses.
These amounts belong in an annual calendar that shows in which months outflows bunch together. The reserve does not have to carry each of these payments alone if a separate reserve account for taxes already exists. Without that separation, a surcharge for large annual payments belongs in the calculation.
| Fixed monthly costs | €18,000 |
|---|---|
| Scenario A: stable revenue, many customers, 3 months | €54,000 |
| Scenario B: pronounced seasonality, 4.5 months | €81,000 |
| Scenario C: two major customers with a 60 % share of revenue, 6 months | €108,000 |
| Surcharge for large annual payments without a separate reserve account (assumption) | €20,000 |
| Scenario C including surcharge | €128,000 |
The number of months in each scenario is an assumption for illustration, not a recommendation. The example shows how strongly the answers to the six questions shift the size of the reserve: depending on its situation, the same business arrives at more than twice the amount.
The credit line as a second line of defence
An overdraft facility (Kontokorrentkredit) with your main bank looks like a reserve at first glance: the money is available without having to sit in the account. But it is borrowed money, usually carries noticeable interest and depends on the bank's assessment. Depending on the contract, credit lines can be adjusted or cancelled, and this risk is greatest precisely when the business's situation is deteriorating.
A clear order of priority therefore makes sense: first your own reserve, then the credit line for short-term peaks. A line that is agreed in good times and hardly used is a valuable second safety net. It is no substitute for your own money.
Where the reserve is kept
Above all, the reserve needs to be available; return is secondary. Part of it usually sits in the business current account to absorb day-to-day fluctuations. Another part can be held in an instant access savings account (Tagesgeld). If you will not need a base amount for some time, you can hold it in fixed-term deposits with staggered maturities, so that part of the money is released at regular intervals. This staggering is often called a fixed-term deposit ladder.
Bank deposits are covered by the statutory deposit guarantee. Under the German Deposit Guarantee Act (Einlagensicherungsgesetz), it protects up to 100,000 euros per depositor and bank, regardless of the number of accounts. According to the Federal Financial Supervisory Authority (BaFin), partnerships and corporations are covered as well as private individuals; exclusions include public bodies and financial firms. In a compensation event, payment is made within seven working days. The higher cover of up to 500,000 euros applies only to certain, mostly private, events, such as proceeds from the sale of a privately used residential property.
If the reserve is well above this limit, the question arises whether to spread it across several institutions. Many banks also belong to voluntary protection schemes, but there is no legal entitlement to their benefits. What protection looks like in an individual case can be checked with the institution concerned.
Rolling planning over 13 weeks
A reserve is at first just a number; only planning turns it into a management tool. A rolling liquidity plan covering 13 weeks, roughly a quarter, is widely used. Week by week, expected receipts and payments are entered; at the end of each week the plan is compared with the actual account balances and extended by a further week. This creates a moving window that shows shortfalls while there is still time to act.
The plan also answers whether the reserve is still adequate. If the planned balance in a given week falls below the minimum you have set, that is a signal to postpone payments, chase receivables or talk to the bank. For a first estimate of how many months the available money will cover current costs, the cash reserve calculator is a good place to start.
A credit line is borrowed trust; a reserve is your own money.
The right cash reserve is not a textbook figure but the result of an honest stocktake. Fixed costs, fluctuations in revenue, customers' payment habits, dependencies and large annual payments together form a picture from which a well-founded figure can be derived. If you know this figure and review it regularly, you can face fluctuations more calmly and seize opportunities when they arise.
Frequently asked questions
How many months of costs does a cash reserve usually cover?
Three to six months of fixed costs are often cited. This range is a guide. Businesses with stable revenue, many customers and short payment terms are more likely to manage with the lower figure, while businesses with strong seasonality, long projects or a few major customers tend to need more. What matters are the answers to the questions about costs, revenue and payment times.
Are company deposits protected by the deposit guarantee?
Yes. According to BaFin, the German financial supervisor, partnerships and corporations as well as private individuals are covered by the German Deposit Guarantee Act, up to 100,000 euros per depositor and bank. Exclusions include banks, insurers, investment firms and public bodies. The limit applies to all of a depositor's accounts at the same bank combined.
Does a credit line count as part of the cash reserve?
An agreed credit line increases your financial room for manoeuvre, but it is not your own money. It costs interest and depends on the bank, which can adjust or cancel lines depending on the contract. It can therefore be seen as a second line behind your own reserve, mainly cushioning short-term peaks.
What is a 13-week plan?
A rolling liquidity plan that records expected receipts and payments week by week for the next 13 weeks. Each week it is compared with the actual account balances and extended by one week. In this way it reveals shortfalls early enough for you to talk to customers, suppliers or the bank in good time.
Terms
- Cash reserve
- Freely available money held by a company (Liquiditätsreserve) that bridges short-term gaps between income and expenditure without new loans.
- Overdraft facility
- A credit limit on the business current account (Kontokorrentkredit) that can be drawn on flexibly up to an agreed ceiling and paid back again.
- Deposit guarantee
- Statutory protection of bank deposits (Einlagensicherung) that, in a compensation event, reimburses up to 100,000 euros per depositor and bank.
Sources
- Einlagensicherung und Anlegerentschädigung (in German)Federal Financial Supervisory Authority (BaFin)
- Einlagensicherungsgesetz, § 8 Deckungssumme (in German)Bundesministerium der Justiz
- Bürgerliches Gesetzbuch, § 286 Verzug des Schuldners (in German)Bundesministerium der Justiz
- Bürgerliches Gesetzbuch, § 288 Verzugszinsen und sonstiger Verzugsschaden (in German)Bundesministerium der Justiz
- Bürgerliches Gesetzbuch, § 271a Vereinbarungen über Zahlungs-, Überprüfungs- oder Abnahmefristen (in German)Bundesministerium der Justiz
Image: illustration, created with AI.
