Your small business needs cash to survive. The same way you need oxygen to breathe and water to drink.
Business survival depends on positive cash flow and liquidity. And it’s especially important in times of financial uncertainty, plagued by tariffs, inflation, recession, and instability.
Lack of cash causes more business failures than any other single factor. Creating a business emergency fund can help you avoid that. It will offer a lifeline during the lean times. And when things are good, it gives you the space and flexibility to take advantage of opportunities as they crop up.
Your Business Needs Cash to Survive
You can’t run or build a business without money. You’ll have to pay employees, contractors, vendors, federal and state taxes, and yourself. Ideally, all of that will be paid using money the business generated. That money is your company’s cash flow.
Cash flow is not the same as profits. Your business can have one of those but not the other. Profits are the difference between your business revenues and expenses. Cash flow is the way money moves in and out of your business. You can have positive cash flow without profits. And you can have profits without positive cash flow.
Over the long haul, your business will struggle if it doesn’t earn profits. But your company cannot survive – it will fail – if it doesn’t have cash.
Why Your Business Is Short on Cash
Cash shortfalls happen all the time, often unrelated to profitability. Highly profitable companies, at least on paper, run out of cash and end up shutting down.
There are many reasons a business can run out of cash including:
- Revenues are less than expenses
- Prices are too low
- Customers pay late or not at all
- Paying vendors too soon
- Investing in too much inventory
- Expanding too quickly
- Accounting mistakes
You can control some of these issues, like not paying vendors before their invoices are due or managing inventory levels more strategically. Others can be difficult to manage, like getting customers to pay on time. And some are completely beyond your control like tariffs, recessions, and economic uncertainty.
That’s why you want to pay attention to cash flow management. And why you want to have a strong business emergency fund.
Cash Reserves Keep Your Business Alive
A business emergency fund, also known as cash reserves, can make the difference between success and failure.
Any business at any time can experience a cash shortfall. With an emergency fund, you can weather it. Without cash reserves, your business can collapse.
According to the United States Courts, for the 12-month period ending March 31, 2025, business bankruptcies increased by 14.7% with a staggering 23,309 companies filing. [Source: https://www.uscourts.gov/data-news/judiciary-news/2025/05/01/bankruptcies-rise-131-percent-over-previous-year]
That’s where a business emergency fund would make all the difference for your company. It’s money put aside to cover regular expenses during shortfalls, when the cash you’re bringing in can’t cover the cash you’re sending out. Those reserves will be a critical lifeline when times are lean. And in good times, that excess cash will let you take advantage of opportunities without risking your working capital.
How Big Should Your Business Emergency Fund Be?
Similar to your own emergency savings, the basic recommendation for business cash reserves is 3 to 6 months’ worth of operating expenses. Those include all of the regular costs of running your company like payroll, rent, and utilities. You can find that information on your company’s profit & loss statements (P&Ls). And then you’ll use those numbers to start figuring out your company’s cash budget.
There are cash outlays that don’t show up on the P&L like
- credit card payments
- the principal portion of loan payments
- transfers to yourself (other than actual payroll)
- vendor payments (accounts payable)
Make sure to include those in your cash outlay calculations to make sure your cash budget doesn’t miss anything. Sort of like how you have to remember to include semi-annual expenses like car insurance or dental exams in your personal budget.
You’ll also want to consider your business cash flow risk factor: The idea that money sources you’re counting on could run dry. That could be from things like expiring contracts or losing your best customer. For example, if you have a single customer that provides most of your company’s revenues, that’s a bigger cash flow risk factor than if no customer contributes more than 5% or 10% of your total incoming cash.
Considering all of these factors will help you figure out the right amount to put into your business emergency savings. And after you figure that out, you’ll need to open an account and start funding it.
How to Choose a Business Emergency Savings Account
Once you know how much money you want to stash in your business emergency savings account, you’ll need a place to keep it. There are a few options available where you can park those cash reserves. All of them provide at least some interest income, letting your money earn some more money of its own.
The right choice for your business will depend on how frequently or how fast you expect to need to access this cash.
You’ll need to consider other factors too when you’re choosing the account you want, such as:
- interest rate for the account
- monthly maintenance fees
- minimum balance requirements
- mobile deposits
- local branches and nearby ATMs
- withdrawal restrictions
While it may seem like the easiest path is to just open another account in the bank your business already uses, that can make it harder to build and maintain the reserves you need. It’s easier to dip into an account that’s right there, so it may be helpful to keep this account separated from your normal business funds.
You’ll also have a few choices when it comes to the type of account you’ll want to use for this.
High-yield savings accounts (HYSAs) offer higher than average interest rates on business savings, usually substantially higher than national averages. Downsides may include delays in accessing the money (like a two-day transfer, for example) or a limit on the number of withdrawals allowed per month.
Interest-bearing checking accounts offer minimal (but more than zero) interest on a regular checking account. This also gives you instant access to the funds 24/7. Downsides often include higher fees and higher minimum balance requirements than standard business checking accounts.
Standard savings accounts offer minimal interest and (usually) ATM access. Downsides can include account fees and a limit on the number of withdrawals allowed per month.
Money market accounts sort of combo accounts, like a savings account that come with a checkbook. They usually offer higher interest rates than standard savings accounts do, but lower rates than HYSAs. Downsides include limits on the number of allowable monthly transactions and high minimum balance requirements. [Note: Don’t confuse this with a money market fund, which is a type of investment rather than an FDIC-insured bank account.]
Knowing how each of these accounts work and how they fit with your savings goals will help you make the best choice for your business. You’ll be able to build and grow your business emergency savings account. And that will help your company weather even during the toughest financial situations.
Now You Know Everything You Need to Do to Build Up Your Business Emergency Fund
So go ahead and get started. As mentioned, the best place to start is to figure out how much you’ll need to stash away for emergencies. Don’t panic if that number feels huge. You don’t have to put it all away at one time. But open an account, like a HYSA or interest-bearing checking account, and keep putting a small amount in every month.
Over time, your business emergency fund will grow. And most importantly, it will be there when you have that unexpected emergency. Which is exactly why you created it.
Ideally, that money will just sit there, growing and growing, and you’ll be able to stop contributing once you reach your planned amount. Then it will just accrue interest for you, making money all on its own.
If you want to put your business into a better position to achieve that, I recommend my book Starting a Business 101.
I wrote this book specifically for small business owners as I have helped a lot of small businesses plan, grow, and even end, during my time as a CPA. And I’m a small business owner myself, so I know how important many of the steps I outline in this book are,,, and how many small business owners tend to skip over them.
This book is a step-by-step guide to help you start, maintain, and grow your business to profitability, and beyond. I even help you steer around the most common pitfalls small businesses encounter on their path.
Click on the button below to find out more and get your copy now.
As I mentioned, I work with a lot of small business owners and I do offer small business services to a select number of clients. If you are interested in working with me to help your small business grow and thrive, please fill out the contact form and we can schedule a free consultation to see if we’re a good fit for each other.