Running a small business means living with a certain amount of uncertainty — seasonal demand, late-paying customers, sudden repairs, or an unexpected tax bill can all knock your cashflow off balance. I always recommend building an emergency cash reserve: a dedicated pot of money that keeps you trading when things don’t go to plan. Below I explain how I approach reserves with clients, the practical steps to create one, simple calculations to set a target, and how to keep it working for you.
Why an emergency reserve matters (and what it should do)
An emergency reserve isn't the same as working capital you use every month. Think of it as insurance that preserves your business while you solve the underlying problem. A healthy reserve will:
- Cover fixed costs during short downturns or slow seasons
- Give you time to chase late payments without stopping payroll or suppliers
- Pay for unexpected one-off expenses (equipment failure, legal fees, urgent repairs)
- Help you avoid expensive short-term borrowing or overdrafts
I encourage treating the reserve as sacrosanct — only to be used for genuine emergencies. When you dip into it, have a plan to rebuild it quickly.
How much should you aim for?
There’s no universal number. I usually help clients choose a target based on their cost structure and cashflow volatility. Two practical methods I use are:
- Fixed-months method: Reserve enough to cover 2–6 months of your average fixed costs (rent, salaries, loan repayments, essential utilities).
- Percent-of-revenue method: Keep 10–25% of average monthly revenue, adjusted for how predictable your income is.
To make that concrete, here’s a simple table you can use to set a target:
| Scenario | When to choose | Suggested target |
|---|---|---|
| Very predictable income (retainer clients) | Low volatility | 2 months of fixed costs |
| Seasonal business (hospitality, tourism) | High volatility | 4–6 months of fixed costs |
| Freelancers/sole traders with variable work | Medium volatility | 3 months of fixed costs or 20% of annual revenue |
Here’s the basic calculation I run with clients for the fixed-months method:
Reserve target = Average monthly fixed costs × Number of months to cover
Fixed costs are those you still have to pay even if sales drop: rent, essential staff, insurances, loan interest, minimum supplier commitments.
Step-by-step plan to build the reserve
Turning a target into reality is about small, consistent actions — not a sudden windfall. I follow this practical plan with clients:
- Know the target: Calculate your fixed costs and set a realistic timeframe (6–12 months) to reach the reserve.
- Open a separate account: Use a separate business savings account to avoid temptation. I often recommend looking at Starling Business Savings, Tide Savings Pots, or Revolut for Business Vaults for ease of use and instant transfers.
- Automate transfers: Put a standing order in place the day after payday to transfer a fixed amount. Treat it like a recurring expense.
- Use windfalls wisely: Allocate a portion of tax refunds, one-off profits, or owner dividends to the reserve.
- Trim discretionary spend: Temporarily reduce non-essential subscriptions or marketing while building the pot — but don’t cut what drives revenue.
- Review quarterly: Check the target and progress every quarter and adjust contributions if income improves or worsens.
Practical examples
Example 1 — Small café
- Average fixed costs: £6,000/month
- Target: 3 months = £18,000
- Plan: Save £1,500/month for 12 months and add 50% of any festival-season profits.
Example 2 — Freelance designer
- Average fixed costs: £2,000/month
- Target: 3 months = £6,000
- Plan: Put 15% of each invoice into a Revolut Vault automatically; top up from quieter months’ expense savings.
Where to hold the reserve
Liquidity and safety are the main priorities. I prefer:
- Easy-access business savings accounts (banks like Starling, Monzo Business for Pots, or traditional banks’ instant-access savings) — you can access cash quickly without penalties.
- Short-term notice accounts or business money market funds for slightly higher returns if you don’t need immediate access to all funds.
- Avoid risky investments for reserve funds — the aim isn’t to chase returns but to protect the business.
Rules for using the reserve
To prevent the pot from being treated like general cash, set simple rules and stick to them:
- Only use for predefined emergencies (e.g., cover payroll during a client payment delay, major equipment failure, urgent compliance fines).
- Document the reason and the expected date to rebuild the pot whenever you withdraw.
- Limit withdrawals without board/partner approval if you’re a multi-owner business.
Rebuilding after you use it
If you need to use your reserve, rebuild it quickly and prioritise repayments over discretionary spend. I often set a short-term recovery plan like:
- Extra 25–50% of normal savings contribution until the reserve is back to target
- Temporary pause on owner drawings or dividends
- Small, quick wins to improve cash collection: shorter payment terms, clearer invoicing, incentivising early payment
Tools that help
Use simple tools to track progress and automate where possible:
- Spreadsheets — a one-page cash reserve tracker with target, balance, and months-to-go is often enough.
- Accounting software — Xero and QuickBooks let you tag savings transfers and forecast cash balances.
- Bank features — Pots or vaults in Starling, Monzo, Tide, and Revolut for Business make it easy to separate the money.
- Cashflow forecasting apps — Float, Fluidly, or Pulse can show how long your reserve will last under different scenarios.
Building an emergency reserve is one of the highest-impact things you can do for resilience. It doesn’t have to be perfect from the start — pick a target, automate contributions, and protect that pot. The peace of mind it gives you when the next unpredictable cycle hits is worth the discipline.
