What should I do with the cash piling up in my business account?

This happens to a lot of very well-meaning people, and it comes from somewhere real. You remember a time when you very literally ran out of money. I've been there several times myself. You almost couldn't make payroll, or worse, you went into debt to make payroll.

That lesson is correct. Most businesses that don't make it early on run out of operating cash. If your business is young, hoard your cash and don't apologize for it. Everything below assumes you're past that point.

How the pile creeps

At first ten thousand dollars in the account feels good. Then thirty. Then fifty, then a hundred, then two fifty, then five hundred.

Each step feels a little safer than the last, and none of them was ever decided on. That's the whole problem. It feeling good to have a certain amount of cash isn't a reason to have that amount of cash. You should have a calculable reason.

The number you can actually justify

A business cash account is a lot like an emergency fund at home. Three to six months of operating capital is where most businesses land.

Take the burn rate of your business first. If things dried up, what leaves the account each month? Then weigh how volatile your revenue is, and how much concentration risk there is in where you get paid from. How many clients, how many patients, how many vendors. Somewhere in that range is usually appropriate, and every once in a while we'll recommend a little more or a little less.

Above that number

Once you've had the logical, mathematical conversation about why a specific amount makes sense, the rest of it is essentially like having employees that you don't have working. They're just sitting around. You should put it to work somewhere.

Sometimes that's a government bond ladder, a money market fund, or a high yield savings account, which you should probably be doing from the very beginning anyway. Sometimes it's the middle ground of investing the excess in other businesses rather than more of your own, which works well for a lot of pass-through entities and gets complicated inside a C corporation.

The numbers get bigger in a hurry. One business I sat with recently was burning about three hundred thousand a month, and the interest they'd been leaving on the table came to roughly eighteen hundred dollars a month. That's half of a person's wages.

The full worked example, including how that reserve was split and why the ladder was thirty and sixty days, is here: Cash is piling up in the business account. What should I do with it?