A cash reserve provides capacity to meet obligations when receipts are delayed or disruption occurs. The appropriate amount depends on the business's commitments, volatility and access to dependable funding; one fixed number of months is not suitable for every company.
Estimate essential cash payments under credible disruption scenarios. Identify which spending can be delayed and which would threaten operations or contractual obligations. Consider the time needed to restore collections, replace a key supplier or obtain approved financing.
Check how quickly the reserve can be accessed and whether restrictions limit its use. Do not count an uncertain borrowing arrangement as equivalent to available cash. Record the assumptions used to set the reserve and the authority required to use it.
Review the target after changes in scale, payment terms or risk. Replenish funds according to a realistic plan when they are used. The reserve should support continuity without disguising a persistent operating loss that needs a separate response.
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