Which payments would continue if income slowed?

Start with the payments you would still need to make during a quiet period or interruption. Review recent bank and card activity, then list rent, insurance, essential subscriptions, wages, minimum supplies, and required loan payments. Separate costs you could stop quickly from commitments that would continue.

Use a realistic reduced level of activity. A hairdresser may buy fewer products with fewer bookings, but chair rental and insurance could remain unchanged. A driver may spend less on fuel while unable to work but still owe vehicle payments. Do not assume every cost falls in proportion to sales.

A P&L is a useful starting point, but check cash payments separately. Loan principal uses cash even though it is not an ordinary business expense. A large annual bill may fall within the period you are covering. Include the amount actually due during that period instead of relying only on an average monthly expense.

How many months should the reserve cover?

Choose a period by asking how long the business could reasonably need support. Consider how long customers take to pay, how quickly you could replace a lost client, and how long a repair or illness might stop work. A business with several regular customers has a different exposure from one relying on a single large payment.

Bank of America's emergency-fund guidance suggests three months of business expenses as one possible benchmark. Treat that as a starting point for calculation, not proof that a particular amount is enough. Compare several coverage periods with your own costs and risks before choosing a target.

Seasonal businesses should also plan for known slow months. A predictable winter shortfall belongs in the trading plan; an unexpected repair needs its own allowance. If both could happen together, calculate the combined cash need rather than assuming the same dollars can cover each separately.

How do you calculate a cash reserve?

Reserve target = essential cash payments during the coverage period + extra contingency allowance

Suppose a small salon estimates essential payments of $3,000 a month during reduced trading. The owner chooses three months for this example and adds a $1,500 allowance for an equipment repair that is not included in those monthly payments.

Example reserve = ($3,000 x 3 months) + $1,500 = $10,500

At the same monthly cost, two months plus that repair allowance would be $7,500; four months would be $13,500. These are scenarios, not recommended amounts for every salon. The owner should compare them with the time needed to recover bookings, keep staff paid, and replace equipment.

This example assumes no customer receipts during the covered period. If you instead assume reduced income, show that amount separately and test what happens if it arrives late. Do not label an optimistic sales estimate as money already in reserve.

Is the money in your bank account all available as a reserve?

No. Suppose the salon has $12,000 in the bank, with $2,500 allocated to taxes and $2,000 needed for bills before the reserve period begins. That leaves $7,500 toward the $10,500 reserve target, a $3,000 gap.

The dates are important. In this example, the $2,000 pays bills before the three-month coverage period, so it is separate from the $9,000 of essential payments within it. If a bill is already included in your coverage calculation, do not deduct it from available cash and add it to the target again.

Keep personal emergency savings distinct too. A sole proprietor may rely on business withdrawals for household bills. Decide whether your personal reserve covers those bills or whether planned withdrawals belong in the business cash calculation. An owner's draw is not a deductible business expense, but it still uses money.

How can you build the reserve gradually?

Calculate the gap between the target and cash genuinely available for it. Then choose contributions the business can afford after upcoming commitments. In the salon example, six contributions of $500 would close the $3,000 gap, provided the reserve is not used and costs do not change.

A separate account can make the balance easier to identify. Moving money between your own business accounts does not create an expense or increase your total cash; it changes where the money is held. Keep it accessible on the timetable you might need it, and check withdrawal restrictions before choosing where to hold it.

Agree what would justify using the reserve and how you would rebuild it afterward. A reserve can pay a repair bill or support a temporary income interruption. If ordinary trading repeatedly uses it up, review ongoing costs, prices, and payment collection instead of treating replenishment as the only problem.

Base your reserve on the costs your business actually pays.

Koody auto-categorizes imported bank transactions so you can review recurring costs, compare spending periods, and see the records behind your business expenses. Keep household purchases in Personal and business costs in Business, including the correct portions of mixed purchases.

Those records give you a useful starting point for choosing essential payments and reviewing your reserve target. Statement imports and automatic categorization are paid features.

Try Koody

When should you change the target?

Recalculate when rent rises, you hire someone, take on a loan, lose a major customer, or change how quickly customers pay. Review it before a known quiet season and after using part of the reserve. Keep the assumptions with the calculation so you can see what changed.

A reserve target and a weekly forecast serve different purposes: the target sizes the buffer, while the forecast shows when cash may become tight. Once you know what you want to keep available, use a weekly cash flow forecast to check whether upcoming payments could take you below it.

Sources

General business cash-planning information, not an individualized reserve recommendation. Sources accessed November 1, 2026.