How Many Months of Cash Reserve Does a Business Really Need?
The three-to-six month rule, where it comes from, and what Australian businesses actually hold.
Last reviewed August 2026.
Forty percent of Australian small businesses hold less than one month of cash cover. Twenty-two percent hold none at all.
Against advice that says you should hold three to six months. That is a very large gap, and it is worth understanding both halves of it before you decide what your own number should be.
How much cash should a business hold?
Three to six months of fixed operating expenses is the standard Australian guidance, and it comes from the banks and advisory firms rather than from any regulator. ANZ puts it at three to six months. CommBank says around three months. Advisory firms extend it to four to nine months for businesses that are seasonal, payroll-heavy or growing fast.
Note the word fixed. The reserve should cover the costs that keep running when revenue stops, being wages, rent, insurance, loan repayments and core software. Not your variable costs, which fall away with the revenue.
Worth being honest about the status of that rule. No Australian government body, regulator or professional accounting body publishes a recommended reserve. Not the ATO, not ASIC, not the Small Business Ombudsman, not CPA Australia. business.gov.au's cash flow section contains no months-of-cover figure at all. Three to six months is bank and advisory convention, and it is imported convention at that. It is sensible. It is not official.
What Australian businesses actually hold
| Cash cover held | Share of Australian SMEs |
|---|---|
| No cash reserves at all | 22% |
| Less than one month | 18% |
| Less than one month, combined | 40% |
| Less than two months | About 66% |
Source: Prospa and YouGov, April 2024, 506 Australian business owners and decision-makers in businesses under 50 employees. In the same survey, 21% expected to run out of cash within one to two months, 46% had reduced their own income, and 31% had used personal funds for business expenses.
The Australian Bureau of Statistics published a distribution once, in February 2021, and then retired the question. At that point 14% of small businesses had under one month of cover and 41% of all businesses had less than three months. It is the only official Australian data that has ever existed on this, and it is now five years old.
The operating reality behind those numbers comes from Xero, which sees the bank feeds. Australian small businesses are cash flow negative for an average of 4.2 months a year. One in five is cash flow negative for more than six months of the year. Ninety-two percent have at least one negative month.
So for a lot of businesses this is not a question of surviving a shock. Negative months are the normal operating rhythm, and the reserve is what carries them through a recurring trough rather than an unexpected one.
Why this is the number that ends businesses
ASIC's analysis of failed Australian companies nominates inadequate cash flow or high cash use as a cause in 52% of them. It is the single most common cause, ahead of trading losses.
The shape of those failures is worth seeing:
83% had assets of $100,000 or less
82% had fewer than 20 employees
96% of unsecured creditors recovered between zero and eleven cents in the dollar
Businesses that fail do not wind down with something left over. They run to zero.
For scale: 14,152 Australian companies entered insolvency in 2025-26, down about 3.9% on the prior year but still above the long-run average. Construction accounted for 3,472 and accommodation and food services for 2,078.
Two leading indicators are worth watching more than any ratio. A single trade payment default against a company raises its likelihood of insolvency to more than ten times the national average over the following twelve months. And businesses carrying ATO tax debt above $100,000 have a 21.9% insolvency rate, which is thirty-one times the national average.
The late payment problem, honestly
The averages are improving and the tail is getting worse. Both things are true and only one of them will hurt you.
The averages. Australian small businesses are now paid an average of 22.9 days after invoicing, about six days late. That is close to the best it has been since the series began in 2017.
The tail. One in three invoices from large businesses to their small suppliers is still paid late. The median is 23 days, but the 95th percentile is 64 days against typical 29-day terms, and that 95th percentile got slower, not faster. CreditorWatch has overall late payments at a six-year high, with 11.37% of invoices in food and beverage services running more than 60 days overdue.
The practical read: if your customers are small and numerous, the average applies to you and you are probably fine. If two or three large customers dominate your revenue, the average is irrelevant and you need to size your reserve against their behaviour, not the national figure.
How much you actually need
Start at three months of fixed costs and adjust up for each of these that applies to you.
| If this describes you | Push toward |
|---|---|
| Steady revenue, small diverse customer base, low fixed costs | 3 months |
| Payroll-heavy, most costs fixed | 4 to 6 months |
| Two or three customers are most of your revenue | 5 to 6 months |
| Long payment terms or a history of slow payers | 5 to 6 months |
| Growing fast and hiring ahead of revenue | 6 months |
| Genuinely seasonal | The full trough, see below |
If wages are most of your fixed cost base, your labour percentage is the number driving this one.
Seasonal businesses need a different calculation entirely. Australian small businesses take only about 7% of annual revenue in each of January and February, roughly 20% below a typical month. If you are a tourism, hospitality or agricultural operator earning most of your year in a four or five month peak, your reserve is not three months of costs. It is enough to carry seven or eight months of fixed costs, and you have to bank it during the peak when it feels like profit.
That is the hardest discipline in a seasonal business, and it is the one that separates the operators who last from the ones who have a bad season and disappear.
Does an overdraft count?
No, and this is worth being firm about.
A facility is useful and it is not a reserve, because lenders reduce facilities during downturns, which is precisely when you need one. The time you most want your overdraft is the time your bank is most likely to review it.
The cost argument reinforces it. The average Australian small business lending rate is around 7.45%, about 1.75 percentage points above what large businesses pay. Unsecured or working capital lending, which is what you get when you need money quickly and have no property to offer, runs at an indicative 15% to 30% a year. Australian SME credit is overwhelmingly security-dependent. Unsecured lending is under 5% of total SME credit, and residentially secured loans average 4.5 times larger than those secured other ways.
If you do not own property, you should assume no facility will be there when you need it, and hold real cash instead.
Where to hold it. In a separate account from your operating account, in a business savings account earning something, ideally without a debit card attached. Splitting it into two buckets works well: an emergency fund you do not touch, and a trading liquidity buffer that absorbs the normal monthly swings.
Work out your own number this week
Three steps, about half an hour.
Add up one month of fixed costs. Wages and super, rent, insurance, loan repayments, core subscriptions. Not stock, not variable costs.
Divide your available cash by that number. That is your months of cover.
Compare it to the table above, not to three months as a blanket rule.
If the answer is under one month, that is the most urgent number in your business and it sits ahead of anything to do with growth. You are in the 40%.
If you cannot easily separate fixed from variable costs, that is its own finding, and it is what a Business Analysis sorts out first.
Call me at 0491 729 043, or book a conversation at sarahcolgate.com.au.
Sources. Prospa and YouGov, April 2024 (n=506). ABS Business Conditions and Sentiments, February 2021 and June 2026. Xero Small Business Insights Australia, June quarter 2026. ASIC annual corporate insolvency statistics and external administrators' reports. Payment Times Reporting Regulator, Regulator's Update January 2026. CreditorWatch Business Risk Index, April and June 2026. ANZ and CommBank published business guidance. RBA Bulletin, October 2025. Reserve figures are bank and advisory guidance, not official benchmarks. Nothing here is financial advice.
