Summary of how much cash a UK small business should keep in reserve
- There is no official number of months. A rule of thumb often quoted is three to six months of fixed costs, which is a starting point for your own figure.
- Work out monthly fixed costs, choose a number of months, then add the tax the company already owes.
- In the example, costs are £16,000 a month and a £61,000 balance looks like 3.8 months. After £16,200 of tax owed, the free cash is £44,800, or 2.8 months.
- One customer paying an £18,000 invoice 30 days late takes that to 1.8 months.
- Corporation tax, VAT and PAYE each have fixed dates, so plan the reserve around them.
- Keep the reserve where the company can reach it quickly, and know the £120,000 protection limit.
Most owners can say what is in the bank today. Fewer can say how many months the business could run if sales dropped. A cash reserve answers that question, and the answer is often smaller than the balance suggests.
The costs in the examples are assumptions chosen to show the method, and your own figures will differ. The tax dates come from GOV.UK and the protection limit from the Financial Services Compensation Scheme.
What is a business cash reserve?
A cash reserve is money the company holds so it can keep paying its costs when income falls or arrives late. It is separate from money set aside for tax, which is already owed, and separate from money earmarked for a purchase or a dividend.
Think of it as time. A reserve of 2.8 months means the company could pay its fixed costs for 2.8 months with no sales at all. That is a clearer measure than a pound figure, because it moves when costs move.
Is there a right number of months?
No official figure exists. Guides aimed at small businesses often quote three to six months of fixed costs as a rule of thumb, and some suggest more for a new business. Treat that range as a starting point, because the right number depends on your own risks.
- How reliably customers pay. A business paid in advance or by card on the day needs less than one that invoices on 30 or 60 day terms.
- How seasonal sales are. A business that earns most of its income in a few months needs a reserve to cover the quiet ones.
- How much depends on one customer. Losing a customer that makes up a third of sales is a bigger shock than losing a small one.
- How fast costs could fall. Rent and wages are hard to cut quickly, while advertising and stock are easier.
The more of those apply to you, the nearer the top of the range you should aim.
How do you work out your own figure?
Start with what the business must pay each month whatever the sales. List those costs from the last three months of bank statements, then add them up.
| Cost | Per month |
|---|---|
| Wages and employer costs | £11,000 |
| Rent | £1,800 |
| Software and insurance | £700 |
| Loan repayments | £900 |
| Other overheads | £1,600 |
| Monthly fixed costs | £16,000 |
- Add up the monthly fixed costs. Wages with employer National Insurance and pension, rent, insurance, software, loan repayments and regular overheads.
- Choose the number of months. Use the four risks above to pick a point in the range.
- Multiply the two. At three months the example company needs £48,000.
- Add the tax already owed. Hold VAT, PAYE and corporation tax that is due or building up on top of the reserve.
- Compare with the bank balance. The gap, up or down, is how far the company is from its target.
What does the bank balance really show?
The example company holds £61,000. Its fixed costs are £16,000 a month, so the balance looks like 3.8 months of cover. Then the tax owed comes off. £7,200 of VAT has been collected and not yet paid, and £9,000 has been set aside towards corporation tax.
Worked example
The same bank account, counted two ways
What the balance says
- Cash in the account
- £61,000
- Monthly fixed costs
- £16,000
- £61,000 divided by £16,000
- 3.8
3.8 months of costs
Cash the company can use
- Cash in the account
- £61,000
- Less VAT owed
- £7,200
- Less corporation tax set aside
- £9,000
- Free cash
- £44,800
2.8 months of costs
1.0 month of cover disappears once the tax already owed is taken off, and the company is £3,200 short of three months
The company holds 2.8 months, and its three month target of £48,000 is £3,200 away. The balance was the same all along. What changed was counting only the cash that belongs to the company.
What happens when one customer pays late?
A late invoice is the most common way a reserve gets used. The costs go out on schedule while the money that should cover them has not arrived. The Bank Rate article covers the interest you can charge a customer who pays late.
Worked example
One £18,000 invoice, paid on time or 30 days late
Customer pays on time
- Free cash at the start
- £44,800
- Less one month of costs
- £16,000
- Plus the £18,000 invoice
- £18,000
- Free cash after the month
- £46,800
2.9 months of costs
Customer pays 30 days late
- Free cash at the start
- £44,800
- Less one month of costs
- £16,000
- Invoice not yet paid
- £0
- Free cash after the month
- £28,800
1.8 months of costs
£18,000 less cash after a month, which is 1.1 months of costs, just from one late payer
The £18,000 is still owed, so the loss is temporary. In the meantime the company ran on its reserve, and 1.8 months is nearer to a problem than 2.9. A company with a higher reserve could absorb two or three such delays. A company with less could not.
When do the tax bills fall due?
Three tax payments shape how much of the balance is really free. Each has a fixed date, and the dates below are taken from GOV.UK.
| Tax | When it is due | What to do |
|---|---|---|
| Corporation tax | 9 months and 1 day after the end of the accounting period, for a company with taxable profits up to £1.5 million | Set aside a share of profit each month so the bill is already in the account |
| VAT | Usually one calendar month and 7 days after the end of the accounting period, for the return and the payment | Keep the VAT you have collected in a separate pot until the return is filed |
| PAYE and National Insurance | By the 22nd of the following tax month if paid monthly, or the 19th if paid by cheque | Treat each payroll run as two payments, one to staff and one to HMRC |
Late payment brings interest, which the Bank Rate article explains. The company cash article shows what happens to profit once the corporation tax is paid.
Where should the reserve be kept?
In an account the company can reach quickly. An easy access business savings account suits most reserves, because the money earns interest and can be moved to the current account when needed. Fixed accounts pay more but lock the money away, so they suit money that sits beyond the reserve.
Protection applies up to £120,000 for each eligible depositor with each authorised firm, and brands that share one licence share one limit. The business savings accounts article explains the account types, the tax on interest and the limit.
What should an owner do this week?
- Add up your monthly fixed costs from the last three months. Use bank statements, not memory.
- Pick a number of months and write down why. Use how reliably customers pay and how seasonal sales are.
- Take the tax you owe off the balance. Only count the cash that is free.
- Put the next three tax dates in the diary. Corporation tax, VAT and PAYE each have a date you cannot move.
- Move the reserve to an account you can reach quickly. Check the interest and the protection limit before you do.
A reserve protects the business when sales dip. The other half of keeping more is bringing more in. You can see how similar businesses near you are doing with our free competitor report, and the Grow profit page covers how to win and keep customers. The IQ Money calculators let you put your own figures into the sums.
Questions owners ask
How many months of cash should a small business keep?
There is no official figure. A rule of thumb often quoted is three to six months of fixed costs. The right number depends on how reliably customers pay, how seasonal the business is and how quickly costs could be cut.
Should the reserve include money owed to HMRC?
No. Money set aside for VAT, PAYE and corporation tax is already owed, so only the cash left after those bills counts towards the reserve.
When is corporation tax due?
For a company with taxable profits up to £1.5 million, payment is due 9 months and 1 day after the end of the accounting period. Larger companies pay in instalments.
When do VAT and PAYE have to be paid?
A VAT return and its payment are usually due one calendar month and 7 days after the end of the accounting period. PAYE is due by the 22nd of the following tax month if paid monthly, or by the 19th if paid by cheque.
Where should a limited company keep its reserve?
In an account the company can reach quickly, such as an easy access business savings account. Deposits are protected up to £120,000 for each eligible depositor with each authorised firm, and the interest the company earns counts as company income for tax.
Is an overdraft or loan a substitute for a cash reserve?
It can back a reserve up, but borrowing costs interest and the lender sets the terms. The Bank Rate article shows how those costs move.
How often should the figure be reviewed?
At least once a quarter and whenever costs change, a large customer is added or a loan is taken out.
Keep reading
Sources
- Pay your Corporation Tax (GOV.UK). The 9 months and 1 day deadline and the £1.5 million threshold.
- VAT Returns (GOV.UK). The deadline for the return and the payment.
- Pay PAYE tax (GOV.UK). Monthly payment dates for employers.
- FSCS protected leaflet, February 2026 (FSCS). The £120,000 limit and brands that share a licence.
This article is general information for owners of UK limited companies. The costs, balances and invoice in the examples are assumptions chosen to show the method. The three to six months range is a rule of thumb, not an official figure. It is not tax, legal or financial advice. Speak to a qualified adviser about your own circumstances.
