How Much Cash Should a Business Keep?
The difference between your bank balance and your 'safe to spend' balance, and how to calculate a cash floor that protects your business.
Written by Daniel, peer-reviewed by Marcus
Last reviewed:
Published:
Who this is for: Owners who struggle to decide whether they can afford a new hire, a piece of equipment, or a dividend.
The short answer
The three layers of cash
Think of your bank balance in three layers. The bottom layer is 'The Floor' — your emergency reserve. This money is not for spending; it's for surviving a disaster, like losing your biggest client or a month of zero sales. The middle layer is 'Committed Cash' — money that is already spoken for by HMRC, your staff, and your suppliers. The top layer is 'Working Capital' — the money you actually use to run and grow the business.
Most owners make the mistake of looking at the total and assuming it's all available. This leads to the 'tax surprise' or the inability to make payroll after a quiet month. By mentally (or physically, in separate accounts) separating these layers, you gain a true picture of your financial health.
Calculating your cash floor
Your cash floor should be based on your 'burn rate' — the amount of money that leaves the business every month even if you don't sell anything. This includes rent, core software, insurance, and the minimum you need to pay yourself to survive. For most small businesses, a floor of 3 months of burn is the absolute minimum, while 6 months provides genuine peace of mind.
If your business is highly seasonal or relies on a few large clients, your floor should be higher. If your income is very predictable and diversified, you might be comfortable with a lower floor. The key is to have a defined number that you do not cross.
Worked example: Calculating 'Safe to Spend'
- Total bank balance
- £45,000
- VAT reserve (estimated)
- £8,000
- Corporation Tax reserve
- £6,500
- Next month's payroll & rent
- £12,000
- Emergency floor (3 months of fixed costs)
- £15,000
- Safe to spend / invest
- £3,500
Illustrative example. On a £45,000 balance, the owner only has £3,500 that is genuinely 'extra'. Spending £10,000 on a new project without realizing this would mean dipping into tax money or the emergency reserve.
What to do, in order
- 1
Calculate your monthly fixed burn
Add up everything you must pay even if you have zero sales. Include your own minimum survival pay.
- 2
Set your floor multiple
Decide on 3, 4, or 6 months. Multiply your burn by this number. This is your 'red line'.
- 3
Calculate your committed liabilities
Check your current VAT, tax, and upcoming payroll. This money is already 'gone'.
- 4
Find your safe balance
Subtract the floor and the liabilities from your total cash. This is the only number that matters for new spending.
Common mistakes
- Assuming that a large bank balance means you are rich, without accounting for the tax man's share.
- Setting a floor but then 'borrowing' from it for non-emergencies.
- Not increasing your floor as your business grows and your fixed costs rise.
- Keeping too much cash idle in a zero-interest current account when it could be in a high-interest reserve.
If you only have five minutes
Frequently asked questions
- Should I keep this cash in my main account?
- No. It's too easy to spend if you see it every day. Move your tax reserves and your emergency floor to a separate, high-interest business savings account. Only keep your immediate working capital in your current account.
- What if I can't afford to build a floor yet?
- Treat the floor as a monthly cost. Set aside a small, fixed amount (even just £100) every week until you reach your target. It's better to have a 1-month floor than no floor at all.
Sources
Who wrote and checked this
Written by Daniel Mercer, who has run the numbers on his own small business and writes from that experience. Daniel is not an accountant or a regulated financial adviser. Who writes this site.
Peer reviewed by Marcus Thorne, Small Business Advisor. Peer reviewers check for technical accuracy and compliance with current UK regulations.
Last reviewed: 22 July 2026
Do this next
Next steps
- 1
Put the numbers in: Business Emergency Fund Calculator
Use your own figures rather than the worked example above.
Open the tool - 2
Read next: Why Profitable Businesses Run Out of Cash
Profit is an accounting opinion about a period; cash is a fact with a date on it. How to spot the gap between the two before it breaks a healthy business.
Read the guide - 3
Keep reading
Related guidance
Guides, hubs and tools that cover the same ground as how much cash should a business keep?.