Definition
A cash reserve is a buffer of cash set aside to absorb shocks (revenue drops, delayed collections) without forcing emergency cuts.
Example
A company targeting a 4-month reserve with $200k monthly burn keeps $800k in cash reserve.
How to use it
- Define reserve policy in months of net burn (for example 3-6 months).
- Reserves reduce downside risk but have opportunity cost; revisit as your risk profile changes.
- Separate operational reserves from strategic cash for acquisitions or growth.
Common mistakes
- Setting a reserve target without modeling seasonality or sales cycle length.
- Treating restricted cash as part of the usable reserve.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Cash Reserve" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Runway and burn: gross vs net burn, working capital, and cash levers) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- NPV Calculator: Calculate net present value (NPV) from initial investment, annual cash flow, years, and discount rate.
- IRR Calculator: Estimate internal rate of return (IRR) for an investment using yearly cash flows.
- Discounted Payback Period Calculator: Estimate discounted payback period using a discount rate (and compare to simple payback).
- Cash Runway Calculator: Estimate runway from cash balance, revenue, gross margin, and operating expenses (optionally with revenue growth).
- Break-even Pricing Calculator: Compute contribution margin, break-even units, and profit at a given volume based on price and variable costs.
Guides
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.