Building a cash reserve for slow months
Every business has a bad quarter eventually — the client that pays late, the season that doesn't come, the machine that breaks. A cash reserve converts those events from existential threats into bad weeks. This lesson covers the three real questions: how much, where, and how to build it when every dollar already has a job.
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How much is enough (for you)
Rules of thumb say '3–6 months of expenses' — true but uselessly vague until you define two numbers: your fixed monthly cost floor (rent, insurance, base payroll, loan payments — the bills that arrive even in a ghost town) and your revenue volatility (a 10-year-old landlord's ledger is steadier than a first-year contractor's).
| Your situation | Sensible target |
|---|---|
| Stable contracts, low fixed costs | 6–8 weeks of fixed costs |
| Typical service business, seasonal wobble | 2–3 months of fixed costs |
| Feast/famine, project-based, new (<2 yrs) | 3–6 months of fixed costs |
Size the reserve against your FIXED costs, not total spending — you're insuring the bills that can't be paused, not the lifestyle of a good month.
Where the money lives
- A separate business savings account at your bank — visible, boring, one deliberate transfer away from checking.
- Money-market or high-yield business savings if your bank offers one: the reserve is idle, idle money should at least track inflation.
- NOT mixed into checking ('it'll get spent'), NOT in the operating account ('I'll remember'), NOT in speculative investments — the reserve's job is to be exactly there when the invoice doesn't arrive.
Funding it without starving growth
The conflict is real: every dollar in the reserve is a dollar not spent on marketing or gear. Resolution: fund the reserve as a fixed percentage of every payment that arrives — 3–5% to start, 10% when cash allows — moved the same day the money lands. You adjust to the smaller checking balance within a month; the reserve compounds quietly in the corner.
- Open the account today — friction is the real enemy, not the amount.
- Set the rule in writing: 'X% of every collection, same day, automatic.'
- Raise the percentage when a good month lands instead of raising your spending.
- Raid it only for its job: covering fixed costs in a gap, never for opportunities or gear (those are budget questions, not emergencies).
The reserve doesn't make bad quarters disappear. It makes them quiet.
The JK23 Ledger Letter, issue 7
Frequently asked questions
Should I invest the reserve in something higher-return?
The reserve's job is certainty, not yield — money that can drop 20% the month you need it isn't a reserve. Keep it boring; invest the money you can afford to lose sleep over separately.
What if I need to use it — do I 'fail'?
Using the reserve for its intended job is the system WORKING, not failing. The failure is only when you can't rebuild it — so the rebuild rule (the same % skim) restarts automatically with the next payment.
Reserve or debt paydown first?
Usually a small starter reserve first ($1–2k), because an empty account is an emergency loan at the worst possible price. After that, compare your debt's interest rate to your margin — expensive debt before a bigger reserve.