Business Owner Planning
Cash Is Piling Up in the Business Account. What Should I Do With It?
The hoarding instinct is right early and expensive later. Here's how to calculate the reserve you can actually justify, and what one owner's idle cash was costing every month.
Short Answer
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, and for most businesses that's three to six months of operating capital, sized off your burn rate, how volatile the revenue is, and how concentrated the payers are. Above that number, the extra is essentially like having employees that you don't have working. One business I sat with was burning about three hundred thousand dollars a month. We settled on about a million in reserves, kept a month and a half in real cash, and put the remaining five hundred fifty thousand in a thirty and sixty day government bond ladder. At roughly four percent that's about eighteen hundred dollars a month they'd been leaving on the table, which is half of a person's wages. None of this applies to a young business, where hoarding cash is exactly right.
Most business owners sitting on a big pile of cash are doing it for a good reason, and the reason used to be true. Then the business got bigger, the pile got bigger, and nobody went back and checked whether the reason still held.
This happens to a lot of very well-meaning people. It happened to me. It's also one of the more expensive habits I run into, and almost nobody goes looking for it.
Where The Hoarding Instinct Comes From
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. Cash is king, and you learned it the hard way.
That lesson is correct. Most businesses that don't make it early on die the same way. They run out of operating cash. So there's a desire to hold on to it for dear life, and most owners should.
Let me be clear about this before I go any further, because I don't want the rest of this piece misread. If you have a new business, hoard your cash. Let it pile up. That's a good thing and I'd tell you the same in person.
Ten Thousand Feels Good, Then Thirty, Then Five Hundred
Three To Six Months, Calculated Rather Than Felt
A business cash account is a lot like an emergency fund at home. Three to six months of operating capital. That's the range where most businesses land, and getting to your own number inside it takes three inputs.
Start With The Burn Rate
What does the business consume in a month if everything dries up? That's the unit. Everything else is measured against it. Use expenses rather than net, and use a bad month rather than an average one, because the reserve exists for the month where nothing comes in.
Weigh How Volatile The Revenue Is
A practice with predictable monthly billing needs less cushion than a shop whose revenue arrives in lumps three times a year. Lumpy revenue pushes you toward the six-month end of the range. Steady, predictable revenue lets you sit closer to three.
Count How Concentrated The Payers Are
Then look at concentration risk in where you get paid from. How many clients do you have, how many patients, how many vendors? A business where one payer is a large share of revenue is carrying a different risk than one with two hundred customers, and the reserve should say so. Somewhere in that range is usually appropriate. Every once in a while we'll recommend a little more or a little less. What matters is where the number came from. Arithmetic, rather than a feeling.
What Idle Cash Was Costing One Owner
I ran into this about a month ago. The numbers get bigger in a hurry, more than most people picture. This is roughly where that one landed.
| The piece | Where it landed |
|---|---|
| Monthly burn rate | About three hundred thousand dollars |
| Reserve we settled on | About one million dollars, a little past three months |
| Held in real cash | About a month and a half, roughly four hundred fifty thousand |
| Held in cash alternatives | The remaining five hundred fifty thousand |
| Where the alternatives sat | A thirty and sixty day government bond ladder, because that's the timing in which it would even be possible to need it |
| Assumed yield that day | Roughly four percent |
| What it had been costing them | About eighteen hundred dollars a month, which is half of a person's wages |
Where The Middle Ground Stops Working
There's a step past the ladder, and I love it for a lot of people. You open a business investment account and put the excess into equity in other businesses instead of more equity in your own. Think publicly traded companies. Nothing clever. Rather than putting the money to work in your business, you put it to work in everybody else's.
That works for a lot of pass-through entities. It gets harder once you're a C corporation. You can still do it. The tax treatment often isn't worth it though, and that's a conversation for your CPA before anything moves.
A few other limits worth saying plainly. None of this applies to the operating reserve itself, which should stay boring and reachable. The ladder only works if the maturities match when you could actually need the money, which is why thirty and sixty days rather than two years. Bank deposits carry insurance limits worth knowing if the balance is large (FDIC: deposit insurance). And a money market fund isn't a bank account, whatever it feels like (Investor.gov: money market funds).
Current Treasury bill rates are published daily and they move (U.S. Treasury: daily Treasury bill rates). Four percent was roughly right for that conversation on that day. Yours will be whatever it's on yours, which is exactly why the thirty minutes is worth spending rather than assuming.
The honest summary is that as businesses grow, they underestimate the value of taking thirty minutes and being precise about cash. The owner has more important things on their mind than getting four percent on some of it. That's fair. Then the numbers get big, and thirty minutes is worth eighteen hundred dollars a month going forward.
Follow-Up Questions
How do I calculate a burn rate when revenue swings a lot?
Use expenses rather than net, and use a bad month rather than an average one. The reserve exists for the scenario where revenue dries up, so the honest question is what leaves the account when nothing comes in. Payroll, rent, debt service, insurance. The software nobody can turn off. If your revenue arrives in lumps, that volatility should push you toward the six-month end of the range instead of the three.
Why a thirty and sixty day ladder instead of something longer?
Because thirty and sixty days is the timing in which it would even be possible to need that money. Longer maturities pay a little more sometimes, and they hand you a decision you don't want to make in a bad month, which is whether to sell early. Match the maturity to the need and the whole thing stays boring. That's the point with operating cash.
Should a brand new business be doing any of this?
No, and I'd say that firmly. If the business is young, hoard the cash. Don't apologize for it. Everything in this piece assumes you've reached the point where the account is holding meaningfully more than a calculated reserve. Before that, the extra safety is worth far more than the yield.
Can my C corporation invest its extra cash in stocks?
You can. Whether you should is a tax conversation more than an investment one, because the treatment inside a C corporation often makes it not worth doing. This is the one place in this piece where I'd want your CPA in the room before anything moves. For a lot of pass-through entities it's much more straightforward.
Is a business savings account good enough?
For plenty of businesses, honestly, yes. A high yield business savings account or a money market fund gets most of the benefit with none of the upkeep, and you should probably do that from the very beginning rather than waiting until there's extra. The ladder is for when the balance is large enough that the last fraction of a percent is real money.
What if I'd rather reinvest it in my own company?
Then do that, and I mean it. A dollar that buys a new hire, a second location, or equipment that raises capacity usually beats four percent by a mile. This piece is about the money that isn't doing either job, sitting in the account because it feels good rather than because it's waiting on something. That's the part that should be working.
Sources
Related Talley Wealth Resources
If this question is on your mind, these pages are natural next reads:
Next step
Put The Idle Part To Work
This is a good example of something a real financial planner brings up that an owner would never go looking for. When would you ever even know to ask? If there's more cash in the account than you can justify with arithmetic, that's worth an Explore Call. It's short, there's nothing to prepare, and if we're not the right fit I'll tell you so.
For discussion purposes only. This is educational and not individualized legal, tax, or investment advice. Yields change daily and any figures here are illustrative. Please talk through your own numbers with the right professional before acting.