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.
Measured as
Measure Cash Reserve with the same date, unit basis, and accounting or policy definitions used in the rest of your model.
Misused when
- Setting a reserve target without modeling seasonality or sales cycle length.
- Treating restricted cash as part of the usable reserve.
Operator takeaway
- 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.
- Tie Cash Reserve to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Runway and burn: gross vs net burn, working capital, and cash levers if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Cash Reserve belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
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.