Short answer: A common rule of thumb is to have enough working capital to cover two to three months of operating expenses. The right number for you depends on how long customers take to pay and how seasonal your business is.
Start with your monthly operating costs
Add up what it costs to keep the doors open for a month: payroll, rent, insurance, utilities, loan payments, software and regular supplies. That’s your baseline.
Then think about timing
If customers pay on 30-day terms, you’re carrying about a month of costs before money comes in. At 60 days, closer to two. Add a cushion for surprises like repairs or a slow month.
A quick example
A contracting business with $60,000 in monthly costs and customers who pay in 45 days might want $90,000 to $150,000 available to stay comfortable, especially going into a busy season.
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You don’t have to keep it all in the bank
Many owners keep some cash on hand and use a line of credit as the rest of their cushion. You only pay for what you draw, and it’s there when you need it.
Signs you’re short on working capital
- You regularly juggle which bills to pay first
- You turn down work because you can’t cover the start-up costs
- Payroll week is stressful even when business is good
If that sounds familiar, it’s worth looking at a line of credit.
