How Much Cash Reserve Should Your Agency Have?

TL;DR

Agencies face unique cash flow vulnerabilities that make standard cash reserve advice incomplete. Building the right reserve isn't just about survival—it's about creating the stability that lets you make better decisions and weather client losses without panic. Key takeaways:

• The standard "3-6 months of expenses" rule needs adjustment for agencies, where client concentration, extended payment terms, and project-based revenue create cash flow gaps that generic guidelines don't account for.
  
  
• A risk-adjusted reserve formula—factoring in your largest client exposure and typical payment delays—beats flat "months of expenses" rules that ignore how agencies actually operate.
  
  
• Building reserves requires systems, not just discipline: separating committed funds from available cash and automating contributions before you have a chance to spend the money elsewhere.

You're running a profitable agency. Revenue is up. Then your largest client—30% of your income—announces they're bringing work in-house.

Within weeks, you're scrambling. Not because your business model is broken, but because you don't have enough accessible cash to bridge the gap while you replace that revenue.

This is what agency reserves are actually for: not surviving total collapse, but buying time to replace lost revenue without damaging the business—without panic-hiring, fire-sale pricing, or letting good people go.

The question isn't whether you need a cash reserve. It's whether the standard advice actually fits how agencies operate.

Why "3-6 Months" Often Isn't Enough

The conventional wisdom says businesses should keep three to six months of operating expenses in reserve. That's reasonable guidance for companies with predictable revenue and diversified customer bases.

Agencies rarely have either.

Client concentration creates outsized risk. If 25% or more of your revenue comes from a single client, losing that relationship doesn't just reduce income—it can eliminate your margin entirely while fixed costs remain unchanged.

Extended payment terms mean you're financing your clients. When enterprise clients pay on Net-60 or Net-90 terms, you're covering payroll, rent, and software for two or three months before their payment arrives. That's a structural gap standard reserve calculations ignore.

Payroll doesn't flex with revenue timing. Your team expects to be paid every two weeks regardless of whether clients have paid you. A payroll-heavy cost structure means your burn rate stays constant even when incoming cash doesn't.

A $1.5M agency with 35% client concentration, Net-60 terms, and $100K in monthly fixed costs might find that a "standard" three-month reserve disappears in six weeks when things go sideways.

How to Calculate Your Actual Reserve Target

Start with your monthly operating expenses—the costs you'd need to cover even if no new revenue came in. That includes payroll, rent, insurance, software, and loan payments. Don't include one-time expenses or costs you could immediately eliminate in an emergency.

Then adjust for your specific risk profile:

For a more precise target, use this framework:

Agency Reserve Formula

(Monthly fixed costs) + (Largest client's monthly revenue) + (Average payment delay in months × monthly costs) = Baseline reserve target

Multiply by 1.0–1.5x based on risk tolerance and revenue volatility.

We use revenue rather than margin here because revenue loss hits immediately, while cost reductions lag. You can't cut payroll the same week a client leaves—you need cash to cover the gap while you adjust.

💡 Key Insight: Your reserve target should reflect your actual risk profile. An agency with diversified clients on Net-30 terms has fundamentally different needs than one with two enterprise accounts that pay in 90 days.

The Problem With Too Much Reserve

This might sound counterintuitive, but holding excessive reserves carries its own risks.

Consider two agencies, both doing $2M annually with similar margins. Agency A maintains six months of reserves plus active cash flow forecasting—they know their position and adjust quickly when things shift. Agency B has accumulated twelve months of reserves but rarely looks at the numbers.

When revenue dips 15% over two quarters, Agency A acts within weeks: adjusting pricing, pausing a planned hire, renegotiating a vendor contract. Agency B doesn't feel the urgency. They have runway. By the time they act, margins have eroded for nine months, and the correction requires layoffs instead of adjustments.

Large cash cushions can mask problems that compound over time. The buffer meant to protect you can actually delay the decisions that would have been easier—and less painful—made earlier.

The goal isn't maximum reserves. It's the right reserves paired with visibility into what's actually happening.

Where to Keep Your Reserve

Separation is everything. When reserves live in the same account as operating cash, they get spent. Every slow week becomes an "emergency."

Keep your reserve in a dedicated business savings or money market account. You want accessibility—no early withdrawal penalties—but enough friction that the money doesn't accidentally become part of your operating float. Plus, this is a significant amount of money to have sitting in a bank account: you want to make sure you're getting some form of return on it, even if it's just a few hundred dollars in interest payments each month. 

💡 Key Insight: The biggest challenge isn't knowing how much to save—it's keeping the money separate. Dedicated accounts make reserves real and protected instead of theoretical.

Building Your Reserve Without Waiting for a Windfall

Obviously, most agencies don't have six months of expenses sitting around. You build reserves incrementally:

Automate contributions. Set up a recurring transfer—5-10% of revenue—that moves money to your reserve account before it can be spent elsewhere. Treat it like a bill that must be paid.

Allocate windfalls strategically. When a large retainer deposit arrives or a client pays early, direct a portion to reserves rather than absorbing it into operations.

Establish credit before you need it. A business line of credit secured while your financials are strong can serve as a backup. Waiting until cash is tight usually means you won't qualify for reasonable terms.

Stop Running Your Agency on the Edge

Adequate reserves aren't about pessimism. They're about creating the stability that lets you make better decisions—saying no to bad-fit clients, investing in growth when opportunities appear, and negotiating from strength instead of desperation.

At Iota Finance, we help agency owners build financial systems that go beyond basic bookkeeping—including cash flow forecasting, client profitability analysis, and the visibility that makes reserve decisions straightforward instead of stressful.

If you want to calculate—and maintain—the right reserve without over-hoarding or flying blind, schedule a strategy session to see how we can help.