How Long Could Your Business Survive on Cash Reserves?

• Many small businesses could only last 27 days on their cash reserves.
• The industry your business is in often indicates how long your company can operate without bringing in money.
• You can improve your business’s financial resilience by increasing your credit access and using better cash-flow management strategies.
• This article is for small business owners who want to understand how long their company could survive without additional revenue and how to bolster their staying power.

Research from the JPMorgan Chase Institute finds that many small businesses are living month to month, and the average small company has only enough cash in the bank to last 27 days without additional funds.

“It is well known that small businesses are a critical driver of economic growth, but the consistency of their growth is in question if they’re living month to month,” said Diana Farrell, founding president and CEO of the JPMorgan Chase Institute at the time of the study, in a statement.

How businesses’ staying power varies by industry

Business conditions and operations vary by industry, and staying power without cash flow is no different. The industry that your company operates in is one of the biggest factors impacting how long it can run on cash reserves. This fact is largely because industry influences so many other aspects of the business – such as the facilities needed and the number of employees required to operate.

How long businesses can survive without bringing in any money varies widely among fields.

• Restaurants: 16 days
• Repair and maintenance: 18 days
• Retail: 19 days
• Construction: 20 days
• Personal services: 21 days
• Wholesalers: 23 days
• Metal and machinery: 28 days
• Healthcare services: 30 days
• High-tech manufacturing: 32 days
• Other professional services: 33 days
• High-tech services: 33 days
• Real estate: 47 days

As the study explained, cash reserves are critical for small businesses to meet liquidity needs.

“Cash reserves provide a readily available means to pay employees and suppliers in normal times and are an important buffer to draw upon during adverse times,” the study’s authors wrote. “In other words, cash reserves are a key measure of the vitality and security of a small business.”

Typical business cash reserves

The research found that the median small business holds an average daily cash balance of $12,100. At the high end of the spectrum, small businesses in the high-tech industry have $34,200 in reserves – on average – compared with just $5,300 for small companies in the personal services industry.

When small businesses don’t bring in much more money than they spend each day, it contributes to low cash reserves, the research showed. Overall, the median small business spends an average of $374 each day and brings in an average of only $381 daily.

The study’s authors said this small profit margin leaves small businesses with little wiggle room. “Without strong and continuous cash-flow management, even small changes in cash inflows or outflows – especially if unexpected – can have large impacts on the financial health of these businesses,” the study’s authors wrote.

How to survive longer on cash reserves

The results show that small business policymakers, advocates and private-sector partners need to do more to help small business owners improve their financial resilience, the researchers said. Consequently, they proposed two main courses of action.

“First, increasing access to credit can provide a lifeline to small businesses in the face of economic and/or idiosyncratic shocks,” the study’s authors wrote. “Second, [stakeholders need to be] helping small business owners better manage their cash flows and build up their cash buffer days to weather challenging times without relying on (often expensive) sources of credit.”

The study’s authors think there has to be a better set of available credit offerings to match the needs of the smallest and most financially fragile small businesses and more educational programs that illustrate to small business owners the consequences of poor cash flow management.

“By helping small business owners understand typical levels of cash buffer days for their industry and region, providing information about typical causes of unexpected cash shortfalls, and providing concrete information about the timing and cost of credit options, these programs could help small business owners make better-informed decisions about the levels of cash balances they should seek to hold,” the researchers wrote.

The study was based on data from more than 470 million anonymized and aggregated transactions conducted by 597,000 U.S. small businesses between February and October 2015.

Other factors that impact your company’s staying power

There are many factors that impact how long your business can survive purely on its cash reserves. Many of those are influenced by what industry your organization operates in, but others are independent. Here are a few factors besides industry that impact your company’s staying power:

• Company size: The bigger a business is, the more employees it tends to have and the more it depends on recurring cash flow. A company the size of Amazon probably couldn’t run nearly as long on cash reserves as a one- or two-person shop.
• Revenue types: Cash flow for restaurants and retail operations can dry up for extended periods, while businesses that deal in consumer staples and contract services can better prepare to handle near-term fluctuations in revenue.
• Overhead: Facilities are expensive, as are salaried employees. Having more of both can make it much more difficult for businesses to survive on cash reserves for an extended period. Learn more about overhead and why you should track it.
• Margins: A firm with big profit margins can often build cash reserves more quickly and recover more easily after a period of little revenue.
• Stage of development: Businesses that are young are often still building revenue and structured to last longer periods on cash reserves – or they may be able to find new investors to help them survive longer.

Why staying power matters

Your company’s staying power has always been important, but it’s critical now in these volatile times. Historically, the marketplace constantly changes, but things have been especially uncertain lately for small businesses. Not only are we living in a post-COVID world, but we’re now facing new global conflicts, inflation and an uber-competitive labor market – not to mention ever-evolving competition from global behemoths. In times like these, the ability to keep your business operating amid a dropoff in revenue is paramount.

Dock David Treece contributed to the writing and reporting in this article.