How to build a cash reserve to deal with economic uncertainty

The only thing you can be certain of in business, is that it will always be unpredictable. An unexpected recommendation that lands you a huge contract, an exciting new opportunity, a tax bill, or a tax rebate – as much as you prepare, something always comes along to shake up your plans. 

Global instability, rising costs and shifting economic policy have made the past few years particularly challenging for small business owners. Maintaining cash reserves in such an economy has been almost impossible – but a healthy cash flow is essential to business survival.

To ensure your business has the cash it needs to survive, you need to treat building a reserve as non-negotiable. Make a plan and factor saving for it into your monthly accounts, don’t just wait and hope to save excess profit.

If your emergency fund is currently running low – or you haven’t yet been able to build a cushion – here are four steps to put your business in a strong position to weather economic uncertainty.    

1. Audit your finances

Usually, you’ll need enough cash to cover essential operating expenses for a minimum of three months, although six months is recommended.

Look at all of your outgoings and note those that are non-negotiable for running your business and those that are expendable. For example:

• Essential costs – rent, wages, energy, core materials and equipment

• Expendable outgoings – unused subscriptions, office perks, freelancers

Once you know your essential expenses, calculate how much it would cost to cover those bills for three to six months – that’s the amount of cash your business should aim to hold in reserve.

Find out how to create a contingency plan.

Not only will auditing your finances help you reach the figure for your long-term emergency fund, it could also help you cut costs in the short term. 

2. Make a savings plan

If your emergency fund figure seems overwhelming, especially in the current climate, break it down into manageable monthly contributions. Ideas to kickstart your cash reserve include:

• Regular contributions – Set aside a regular percentage of all future income to go into the fund. No matter how small, any contribution is better than nothing and it will soon add up.

• Windfall profits – Commit to putting any unexpected income or windfall into the fund. If it’s money over and above your usual operational income, invest it for the future. 

• Cut costs – Once you’ve audited your finances and identified potential savings, set up a standing order to channel that saved money directly into your reserve fund.

• Chase outstanding invoices – Late payment is the most common reason businesses struggle with cash flow. Follow up with a polite reminder of money owed, and make sure to charge statutory interest where appropriate (8% plus the Bank of England base rate). 

Find out how to get paid on time.

3. Ringfence your emergency fund

Once you’ve started building your cash reserve, it’s crucial you ringfence the money. Don’t be tempted to dip into it when you have a slow week or just need a little extra. This money is for those shocks you can’t predict or avoid and can’t absorb with your day-to-day income, such as late payments, broken equipment or a sudden drop in revenue.   

When deciding on the best place to keep your cash reserve, look for an account with a high interest rate to make your money work harder and offset the impact of inflation. It’s important to assess all your options and pick the best one for your business. 

4. Reassess regularly

To  boost your cash reserves, reassess how much you need, and how much you have, on a regular basis. With rising costs, your operational expenses will likely be higher next year than this, so make sure you increase your emergency fund accordingly.  

Find out how to manage rising costs.

Define what constitutes an emergency in your business, and clearly set out circumstances in which the fund is to be used. This will ensure everyone in the business is on the same page and avoid any panic spending on things that could have been dealt with in another way. 

5. Consider other options

While holding sufficient cash reserves is best practice, in reality business rarely works in the way we would hope. 

If you’re currently cash poor and facing an unexpected expense or rapidly rising operational costs, FlexiPay may be the right option for you. 

FlexiPay from Funding Circle is a revolving line of credit that gives small business owners complete control of their cash flow. Use it to pay for purchases, bills, invoices and other business costs upfront, and then choose how to spread the repayments.

Find out more about FlexiPay and how it works here. 

How FlexiPay works for small businesses 

• Pay upfront by card or cash transfer

• Repay over 1, 3, 6, 9 or 12 months

• Simple flat fee on each transaction

• Fee free when you pay your off card balance in one instalment

• 0% interest & no annual fees

• Credit limit up to £250,000

If your business could benefit from credit that’s available when you need it, without depleting your cash reserve, apply online in minutes.

27/04/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.