Guide

How many weeks of cash a service business should hold

Forget "three to six months of expenses" — that number ignores how you actually get paid. Here's a formula sized to your invoicing cycle, with a worked example and tiered targets by crew size.

Why "3-6 months of expenses" doesn't work

You've heard the rule. It's in every generic finance blog: keep three to six months of operating expenses in the bank. It's not wrong exactly, it's just useless. A solo handyman who invoices on the day and gets paid by card has completely different cash needs to a three-crew electrical outfit waiting 45 days on commercial accounts. Both get told the same number. Neither gets a number they can actually use.

The real driver of your cash buffer isn't your total spend. It's the gap between when you pay your bills and when your customers pay you. That gap is your risk. Size your reserve to it.

The formula: reserve sized to your payment cycle

Here's a formula built from three things you already know about your business:

• Weekly fixed costs — rent, insurance, loan payments, subscriptions, base wages. The bills that turn up whether or not you work this week.
• Days Sales Outstanding (DSO) — the average number of days between invoicing and getting paid. If you don't track this, pull your last 20 paid invoices and average the days from invoice date to payment date.
• One payroll cycle — the full cost of the next wage run, including your own draw if you rely on it.
• Your largest single materials outlay — the biggest one-off spend on stock or supplies you'd need to front for a job before getting paid.

Put together:

Reserve = (weekly fixed costs × DSO ÷ 7) + one payroll cycle + largest single materials outlay

The first term is the important one. It converts your collection delay into a cash number: how many weeks of fixed costs you need to survive while waiting on invoices. The other two terms cover the lumps — the payday you can't skip and the materials bill you have to pay before the client pays you.

Worked example

Take a two-van plumbing business:

• Weekly fixed costs: $3,800 (rent, insurance, van finance, base wages)
• DSO: 28 days
• Next payroll cycle: $4,200
• Largest single materials outlay: $4,500 (a boiler swap with parts bought upfront)

Run the numbers:

$3,800 × (28 ÷ 7) = $3,800 × 4 = $15,200

$15,200 + $4,200 + $4,500 = $23,900

Call it $24,000. Against $3,800 weekly fixed costs, that's about six weeks of cover. Not six months. Six weeks — but sized to what would actually break this business: a stretch of slow-paying clients hitting at the same time as a payroll run and a big parts bill.

Tiered targets by how you're set up

If you want a quick benchmark before running your own numbers, here's roughly where different setups land, based on how the formula tends to shake out:

Setup	Typical target	Why
Solo operator, paid on the day or by card	~4 weeks	Low DSO, no payroll to cover but you are the payroll
2-3 crew, mixed invoicing and card payments	6-8 weeks	DSO creeps up, real payroll cycle to fund
Anyone carrying net-30 commercial accounts	10-12 weeks	DSO regularly exceeds 30-45 days once late payers are averaged in

These are starting points, not gospel. Run your own weekly fixed costs and DSO through the formula above and use your own answer over the table.

What the formula deliberately leaves out

This isn't your total risk buffer. It doesn't cover a written-off van, a lawsuit, or six months of no work because the local market dries up. It's a working capital number: how much you need on hand to keep operating while waiting on the money you've already earned. If you want a wider safety margin for slow seasons or bigger shocks, add it on top deliberately, don't fold it into this number and lose the clarity of what it's protecting against.

It also assumes your pricing actually covers your costs. If you're not sure your day rate clears your overhead before you even get to cash timing, run it through the break-even calculator first. No cash reserve fixes a business that loses money on every job.

The fastest ways to close the gap

If your current bank balance is nowhere near your reserve target, the fix usually isn't "save harder." It's shortening the two variables in the formula that you actually control: DSO and the materials lump.

1. Take deposits. A 30-50% deposit on jobs over a few hundred dollars turns your biggest materials outlay from a cash-flow risk into a client-funded purchase. This alone often does more for your reserve than anything else on this list.
2. Invoice same day, not end of week. If your DSO clock starts on Friday instead of the day the job finishes on Tuesday, you've added three days of exposure for nothing. Invoice on completion, every time.
3. Raise your price once, properly. A single well-judged price rise increases the cash coming in per job without changing your fixed costs, which shrinks the weekly gap the formula is protecting against. Check the effect on margin per job with the job profitability calculator before you set the new number.

Do these three things and most operators can pull their DSO down by a week or two within a couple of billing cycles, which drops the reserve target proportionally. In the worked example above, cutting DSO from 28 days to 14 days would take that first term from $15,200 down to $7,600, more than halving the total reserve needed.

Building the reserve without starving the business

Don't try to hit the number in one go by hoarding every dollar. Set aside a fixed percentage of each week's takings, 5-10% is a sane starting point, into a separate account you don't touch for operating spend. Review the reserve target every quarter, because your DSO and fixed costs will both move as the business grows. A target that made sense with one van won't make sense with three.