Cash Reserve

A cash reserve is a safety cushion. Rather than spending all available cash or investing it in assets that may be slow or costly to sell, a person or business keeps a portion ready for use at short notice.

For households, the most familiar cash reserve is an emergency fund, used for events such as job loss, car repairs or medical bills. For businesses, a cash reserve helps cover payroll, supplier payments and loan repayments during slow periods, delays in customer payments or sudden problems.

The right size depends on how predictable income and costs are. A business with steady monthly sales of 100,000 and costs of 90,000 might keep enough to cover two to three months of costs, or 180,000 to 270,000. A business with seasonal or unpredictable sales would usually hold more.

The trade-off is return. Money held in reserve usually sits in a bank account or very safe short-term investments that pay little interest. The security it provides comes at the cost of the higher return the money might earn elsewhere.