A cash reserve is the amount a business holds in cash and undrawn credit lines on top of the payments it has already planned for. Every cash flow forecast rests on assumptions, and assumptions drift from reality — a customer pays ten days late, a repair bill nobody budgeted for lands, an order gets pushed back. The reserve is the buffer for exactly that gap.
This guide covers what sets a cash reserve apart from an undrawn overdraft facility and from balance-sheet liquidity ratios, which factors determine how big it should be, how to build one systematically, and how to check it against your rolling forecast rather than setting it once and forgetting it.
What is a cash reserve?
A cash reserve is the portion of available funds not earmarked for known, due or expected payments, but deliberately held as a margin of safety. It sits above the closing balance your cash flow forecast projects for a period, and is only drawn on when the forecast does not play out as expected.
Its purpose is not to cover payments in the ordinary course of business — the ongoing forecast already does that. Its purpose is to absorb an unplanned deviation before it turns into an acute cash flow shortage. How large that margin needs to be depends on how far, and how often, your forecast has historically drifted from what actually happened — and that differs from one business to the next.
Reserve vs. overdraft facility vs. liquidity ratios
Three terms get mixed up in practice, but they mean different things:
- Cash reserve is a management lever: a figure you set yourself, against which the forecasted low point of the coming weeks is checked. It is forward-looking and belongs to the forecast itself.
- Undrawn overdraft facility is a financing source: the unused portion of a credit line the bank has committed. It can make up all or part of the reserve, but it depends on the bank’s commitment and is, in principle, revocable — unlike cash sitting in your own account. A consolidated view across every account and facility is what a bank mirror gives you.
- Liquidity ratios (current, quick and cash ratio) are point-in-time figures taken from the balance sheet. They set current assets against current liabilities and say nothing about how the balance will move over the coming weeks. What the three ratios show, and where they fall short, is covered in the liquidity ratios guide.
Of the three, the cash reserve is the only one that feeds directly into the operational weekly forecast — and the only one a business actively sizes, rather than reading off a balance sheet or a bank agreement.
How big should a cash reserve be?
There is no statutory or universal figure for the size of a cash reserve — it is a management decision. Generic rules of thumb are of limited use, because the factors that actually matter vary widely between businesses:
| Factor | What it means for the reserve |
|---|---|
| Fixed-cost base | Payroll, statutory contributions, tax instalments, rent, leasing, loan repayments and insurance keep running regardless of revenue — the larger this base, the more buffer a weak month requires. In Germany, the VAT instalment’s due date can itself be shifted a month via a standing deadline extension. |
| Seasonality | Strong seasonal swings mean predictable weak months that the reserve has to carry until the season turns again. |
| Reliability of incoming payments | A structurally high or volatile DSO makes the timing and size of receipts less certain — the reserve has to absorb that uncertainty. |
| Access to additional financing | A business that can quickly draw on an undrawn facility or factoring needs a smaller fixed cash buffer than one without that access. |
In practice, a simple starting point works well: look back at how far your 13-week forecast has actually deviated from reality over recent months, and size the reserve at least to that order of magnitude. A figure drawn from a generic rule rather than your own history is still a guess.
A weekly grid with receipts and payments and an automatic low-point warning — the basis for seeing your own forecast deviation.
Building and holding a cash reserve
A reserve is not created by a single decision — it comes together through three steps that, taken together, make it a durable practice:
Step 1 — set a minimum-reserve threshold. Define a concrete amount, or range, below which the planned weekly closing balance should not fall. Without this threshold there is no criterion for when a declining low point becomes something to act on.
Step 2 — build it deliberately. Until the threshold is reached, the same levers that bridge an acute shortage apply: collecting receivables firmly, renegotiating payment terms, and deliberately leaving part of the overdraft facility undrawn. Which levers work best is covered in the cash flow shortage guide.
Step 3 — choose the right mix. A pure cash balance is available at any time but ties up capital that could otherwise be put to work. An undrawn facility usually costs only a commitment fee, but depends on the bank and can be restricted in a downturn. Most businesses combine a smaller fixed cash buffer with a larger facility deliberately left undrawn, and track both together through a bank mirror.
LiquidityLens builds the 13-week outlook with AI from your real bank transactions and open items, and automatically flags when the low point drops below your defined minimum reserve.
See the Liquidity Control SprintTracking the reserve in the 13-week and 13-month forecast
A reserve you define once and never check again is not much use. It belongs in both planning horizons:
In the 13-week forecast, compare the planned closing balance for each week against the minimum-reserve threshold. If a week’s low point falls below it, you typically still have several weeks of lead time to act — unlike finding out from the bank statement on the due date. You can run a first low-point check against your own open-item list with the free 13-week forecast generator, directly in your browser.
In the 13-month plan, the same threshold serves the strategic view: it shows whether a seasonal trough or a planned investment draws down the reserve over several months, and whether it holds until the next strong period. More on the medium-term view and how it ties to the weekly forecast is in the 13-month planning guide.
In both cases, the discipline is the same as for the forecast itself: roll it forward, feed in actual payments, and periodically recalibrate the threshold against the deviation you actually observe.
Frequently asked questions
The most important questions on cash reserves are gathered at the end of this page.