Advice on this usually arrives as a rule: three months, or six. Rules like that ignore that a business with heavy fixed costs and one with almost none are in completely different positions.
Start with what the business costs to keep open
Add up what leaves the bank every month regardless of whether you sell anything. Salaries, rent, EMIs, insurance, utilities, subscriptions, the accountant.
That figure is your monthly survival cost. It is almost always lower than total monthly spending, and it is the only number this calculation needs.
Then decide how many months
Three questions decide it:
- How long is your collection cycle? A business collecting in ninety days needs more cover than one collecting in fifteen.
- How concentrated are your customers? If one client is 40% of revenue, one bad month is a very bad month.
- How seasonal are you? A predictable annual dip needs to be covered, not survived.
Short cycle, spread customers, steady work: two months is reasonable. Long cycle, concentrated customers, seasonal: four to six.
Where it should sit
Not in the current account. Money in the operating account gets used by the operating business, without any decision ever being made.
A separate account, ideally one that takes a day to access. The small friction is the entire point.
How to build it
A fixed percentage of every collection, moved on a fixed date. Not "whatever is left", because there is never anything left.
Five percent feels like nothing month to month and reaches a meaningful figure within a year. Ten percent is uncomfortable at first and stops being uncomfortable surprisingly quickly.
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