Quick answer
A business cash reserve is money kept aside, separate from tax savings, to absorb late payments, slow months and surprises. A common starting point is four to eight weeks of fixed outgoings (wages, rent, loan repayments and regular overheads), more for seasonal businesses or those reliant on a few big customers. Build it gradually from a fixed share of each month's surplus.
Key points
- Size the reserve in weeks of fixed outgoings, not as a round number.
- Keep it separate from GST and provisional tax money, which already belongs to Inland Revenue.
- Seasonal businesses and those with concentrated customers need a bigger buffer.
- An unused, pre-arranged facility can complement a reserve, but isn't a substitute for one.
Every business owner has had the week where three things go wrong at once: a big customer pays late, the ute needs a new gearbox and the GST is due on Thursday. A cash reserve is what turns that week from a crisis into an irritation. The question isn’t whether to have one; it’s how big it should be and how to build it without starving the business.
What is a cash reserve, exactly?
A cash reserve is money the business keeps aside for the unexpected. It isn’t:
- GST or provisional tax savings. That money already belongs to Inland Revenue and has its own dates. Our guide on how much GST to set aside covers it.
- Money for a planned purchase. If you’re saving for a new van, that’s a sinking fund, not a reserve.
- Your personal emergency fund. Owners need one too, but it should be separate.
The reserve is the business’s own shock absorber: available quickly, used rarely, topped back up afterwards.
How do you calculate the right size?
Start with your fixed weekly outgoings: the costs that keep running even when sales slow.
| Fixed outgoing | Typical examples |
|---|---|
| Wages and salaries | Including KiwiSaver employer contributions and the cost of holiday pay |
| Premises | Rent, outgoings, power |
| Finance | Loan and lease repayments |
| Overheads | Insurance, software, phones, vehicles, accountant |
Then choose how many weeks of those costs you want covered. A reasonable starting range is four to eight weeks, adjusted for your risks:
- Add weeks if trade is seasonal, if one or two customers make up a large share of sales, if customers pay on long terms, or if you carry significant stock.
- Subtract weeks if receipts are daily (cafés, retail), the business has very stable contracted income, or you already have an arranged facility you’re comfortable using.
A worked example
Illustrative example. A Palmerston North vet clinic has fixed outgoings of about $28,000 a week, mostly wages. Revenue is fairly steady and comes from many clients paying on the day, but the clinic carries expensive equipment that occasionally needs urgent repair. The owners choose a five-week reserve: about $140,000.
A Queenstown tourism operator with the same weekly costs but a strongly seasonal year might choose ten to twelve weeks, because its quiet months stretch longer and receipts can drop sharply with little notice.
How do you build a reserve without choking the business?
Few businesses can drop $140,000 into a savings account overnight. Build it in steps:
- Set the target and a timeframe, say 18 to 24 months.
- Pick a fixed share of monthly surplus. After tax money is set aside, move a percentage of whatever is left at month end (often 10 to 25%) into the reserve account.
- Bank windfalls. A large one-off job, a tax refund or an insurance payout can jump the reserve forward.
- Trim working capital. Collecting debtors faster or holding less stock releases cash you can redirect. See payment terms and stock and supplier terms.
- Review it quarterly. As wages and costs rise, the target should rise too.
Does the reserve look different for sole traders?
A little. A sole trader’s business account and personal finances are closely linked, and drawings come out of the same pool as business costs. That makes it even more important to keep three pots apart: tax money, the business reserve, and the owner’s personal buffer. If a slow month means drawings stop, the personal buffer is what pays the mortgage while the business reserve keeps the business running. Our feature on paying yourself explains how to set a sustainable drawing so the reserve isn’t quietly spent on living costs.
When should you use it?
The reserve is for genuine surprises and timing gaps, not for funding growth or covering a business that’s losing money. Good uses: a late-paying customer, an unexpected repair, a slower month than forecast, or bridging a tax date when receipts are delayed. Poor uses: buying equipment that should be financed over its life, covering ongoing losses or paying owner drawings the business can’t afford.
When you dip into it, write down why and set a plan to refill it.
Where do arranged facilities fit?
An unused, pre-arranged facility can sit behind a cash reserve as a second line of defence for bigger or longer gaps. It isn’t free, and it has to be repaid, so it complements a reserve rather than replacing it. The best time to arrange one is when the business is doing well and doesn’t urgently need it. If that’s where you are, you can check what you could qualify for in about a minute.
The business.govt.nz guidance on borrowing makes a similar point: understand what each form of borrowing is for and match it to the need.
How does the reserve fit with your forecast?
Your reserve target should come from your forecast, not the other way round. A rolling cash forecast shows your lowest expected balance over the next three months; the reserve should cover that low point plus a margin for things going wrong. Our monthly numbers check includes the reserve as one of the figures to watch.
Building resilience before you need it
A healthy reserve, separate tax savings and a forecast you trust put a business in a strong position, including with lenders. If you’d like a facility in place behind the reserve, or funding for a planned step so the reserve stays intact, talk to us. We look at unsecured options for trading businesses and loans secured on property. Enquiring involves no credit check, your details aren’t shared around other lenders, and a real person on our New Zealand team reads every enquiry. Accurate answers on the form mean the first call can be specific. See if you qualify.
Frequently asked questions
How many months of expenses should a small business keep?
There's no single right answer, but many owners aim for one to two months of fixed outgoings, and more if trade is seasonal or a few customers make up most of the revenue. Your own cash flow forecast is the best guide.
Should the reserve include tax savings?
No. GST and provisional tax money already has a destination and a due date. Count your reserve only after tax money has been set aside separately.
Where should a cash reserve be held?
In a separate account you can reach within a day or two, so it isn't spent by accident but is available when needed. Some owners use a notice saver or on-call account.
Is a line of credit a substitute for a cash reserve?
It can complement one. An arranged facility gives headroom for larger or longer gaps, but it costs money and has to be repaid. A modest cash reserve handles everyday bumps more cheaply.