Dear Karen: How much cash should a small business set aside as a reserve fund?
Answer: Because economic recessions are cyclical, having an adequate capital reserve is imperative for small businesses. It's also important to hedge against seasonal downturns and family emergencies or health problems.
Just as individuals are advised to save enough to meet personal expenses for three to six months, companies should do the same, said Jim Sharvin, a CPA in Torrance.
"Put that savings in a money market fund or a short-term CD. Don't put it at risk at all," he said. And consider that you may need additional cash to fund items such as corporate pension payments, inventory renewals and payroll taxes. "It's better to err by 10% over, rather than minimize your expenses and be surprised later," Sharvin said.