Insights
How much cash reserve should your agency have? Work out your own number
Your agency's cash reserve should cover the monthly shortfall if your largest client left. Cover it for as long as replacing the fees or cutting costs would take. Add what you already owe. That gives a number built on your own risk, not a rule of thumb.
Mohammad Azam, Aprecity Consultants · 5 min read
Why a rule of thumb does not fit your agency
You know you should keep money aside. You hear a figure in months of expenses, and you cannot tell whether it is too much or too little for you.
Two agencies with the same costs carry very different risk. One has twenty small clients. The other gets a third of its fees from one.
Hold too little and one lost client forces layoffs within weeks. Hold too much and cash sits idle that could have paid you or funded a hire.
The reserve formula
Reserve = monthly shortfall without your largest client x months to recover + what you already owe
The shortfall is the costs you cannot cut within a month, minus the fees you keep. Months to recover is how long replacing the fees, or cutting costs, really takes.
What you already owe is tax, bills and payroll sitting in your account that belong to someone else. That money was never yours to spend.
One agency loses its largest client
Run the numbers on an invented agency with $100,000 of monthly fees, $30,000 of it from one client. Its freelancers can stop at once. Its team and rent cannot.
| Line | Before | After |
|---|---|---|
| Fees | $100,000 | $70,000 |
| Team | $66,000 | $66,000 |
| Freelancers | $8,000 | $0 |
| Rent, software and admin | $14,000 | $14,000 |
| Monthly result | $12,000 | -$10,000 |
These figures describe an invented agency chosen to show the arithmetic. They are not a client result.
The owner expects four months to win new work or reduce the team. That is $40,000 of shortfall. The agency also holds $15,000 of tax it already owes.
Its reserve is $55,000. With that in the bank, losing the client becomes a hard quarter, not an emergency.
Work out your own reserve
- ( 01 )
Name your largest client
Take its average monthly fee over the last six months.
- ( 02 )
Split your costs in two
List what you could stop within a month, such as freelancers and some software. Everything else stays in the shortfall.
- ( 03 )
Work out the monthly shortfall
Subtract the fees you would keep from the costs you could not cut.
- ( 04 )
Be honest about months to recover
Count your sales cycle, notice periods and any lease. Owners usually guess short.
- ( 05 )
Add what you already owe
Include tax set aside, unpaid bills and the next payroll. Use the figures from your books, not memory.
- ( 06 )
Keep it in a separate account
A reserve mixed into the operating account gets spent in a slow month without anyone deciding to.
What to do with the number
Compare it with your cash today, after payroll and bills. If you are short, set aside part of each month's profit until you reach it.
In the example, putting half of the $12,000 monthly profit aside builds the reserve in about nine months. You can plan owner pay around that.
Rerun it each quarter. When your largest client's share falls, so does the reserve you need, and the difference is cash you can use.