Cash reserves are funds your business sets aside to cover operating expenses during unexpected events or cash flow gaps. These reserves act as a financial safety net, helping you manage late payments, seasonal slowdowns, or temporary closures without disrupting operations.
Having a strong cash reserve improves financial stability and gives you flexibility to make smarter business decisions during uncertain times.
1. How much cash should a business keep in reserve?
Most businesses should aim to keep three to six months of operating expenses in their cash reserves. The exact amount depends on your industry, revenue stability, and fixed costs.
For example:
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Businesses with seasonal income may need larger reserves
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Businesses with predictable cash flow may need less
A good starting point is to calculate your monthly expenses and multiply by three to determine your minimum reserve target.
2. Liquidate assets for cash
If you have machinery or vehicles you no longer need you could sell them and turn it into a cash reserve.
Other ways to raise extra cash include:
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Leasing equipment instead of buying it
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Selling parts of the business
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Liquidating excess inventory or raw materials
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Re-investing your own capital
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Refinancing against your existing assets
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Finding external investors
Look closely at the business assets on your balance sheet to see what you don’t need and consider what you can convert into cash without impacting your core business. If you’re sitting on excess stock, it’s worth exploring how liquidating excess inventory can improve your cash flow or reviewing ways to liquidate unsold inventory and generate cash quickly. Even small changes like clearing outdated items can help you unlock cash and reinvest it back into your business.
3. Streamline business efficiency
Next, take a close look at how your business could be more cost effective while maintaining or improving efficiency. Document every step of your business process to see where you can improve your capacity to do more with less, or opportunities to generate extra cash quickly. Examples include:
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Raising prices to bring in more cash
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Having more than a few customer segments to rely on
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Diversifying into new growth markets
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Widening your product or service mix
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Negotiating new terms with suppliers
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Amending customer credit terms to collect money faster
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Selling off, closing, or outsourcing any part of your business that doesn’t make a profit
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Focusing on core business activities
Need a hand? Meridian can help you take control of your cash flow with our Cash Management Services. We’ll get to know your business, uncover opportunities to improve efficiency, and recommend the right solutions like our Prosper Chequing account and tailored investment options, so your money works smarter, day to day.
4. Optimize credit control to improve cash flow
Build your cash reserves with an efficient credit control system that will speed up your cash collection and avoid bad debts by limiting how much credit you provide to customers. Consider:
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Requesting customer deposits or progress payments
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Switching from offering credit to immediate payment
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Running credit checks on new and current customers to help assess credit risk
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Monitoring invoices approaching maturity
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Accepting multiple forms of payment to make customer payments easier
5. Explore business funding and financing options
If improving cash flow internally isn’t enough, external financing can help bridge the gap. Accessing the right funding can give you more flexibility to manage expenses, invest in growth, or cover short-term cash flow gaps. From business loans and lines of credit to government grants and funding programs, there are a range of options available depending on your needs.
If you’re not sure where to start, it’s worth exploring the different financing and grant opportunities available to your business—and understanding which ones align best with your stage of growth and cash flow goals.
One last tip - and some next steps
Having enough money set aside in cash reserves available to cover unforeseen business emergencies is sound business practice. Go the extra mile by putting your cash reserve to work by investing it in an accessible savings vehicle such as an interest-bearing business savings account or Guaranteed Investment Certificate (GIC).
So, ready to start building your cash reserves? Here are some ideas about what to do next:
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Determine how much money you should keep in your cash reserves
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Instead of spending cash reserves on equipment, use equipment financing or leasing to get the gear you need.
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To free up extra cash, consider re-financing long-term assets.
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Explore financing options and get answers to any questions you have by connecting with a Meridian Business Advisor.
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