I run a preschool business with a partner. We’re expanding by building new schools and buying others.
My concern is that we don’t save enough. Our payroll is $75,000 a month for one school with 8 classrooms. We take small salaries and save the rest throughout the year, leaving $100,000 in savings, and split the remaining profits. This is how we handle savings for each school.
Should we keep one month’s expenses in savings instead? If something unexpected happens, we plan to contribute personally and then pay ourselves back once the savings reaches $100,000.
What do you think, other small business owners? Is $100,000 a good amount?
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I recommend having at least three months of operating expenses saved. If your revenue is under $1 million a year, you might want to double that. This can include both cash savings and access to credit.
Cash flow problems are the number one reason small businesses fail. Keeping reserves protects your cash flow and gives stability to your business and employees.
@Val
Totally agree—three months of expenses minimum. Are you and your partner actively involved in running the business? If so, what happens if something happens to one of you? It’s worth having a financial backup for both of you. Also, check out business savings accounts like Huntington Bank’s—they currently offer around 5% interest.
Do you have an open line of credit? Even if you don’t use it, it’s good to have as an option. If you have one, two weeks to a month’s expenses might be fine. Without it, I’d keep at least one month’s expenses saved.
@Corey
Having a line of credit is useful, but I wouldn’t use it as a reason to keep less in savings. You can find accounts with good interest rates that let you transfer funds quickly. It’s better than relying on credit and paying interest all the time.
I keep three months of bills like payroll and rent in my checking account, which comes to about $75,000. I’d find it hard to justify keeping more than $200,000 in reserves.
It also depends on your partner’s finances. If 25% of your customers couldn’t pay for a couple of months, would your partner still be able to contribute?
If you pool savings across all your schools, then $100,000 might work since one school’s reserves could cover another’s shortfall. But I’d also set up a line of credit for emergencies.
Savings shouldn’t be used for payroll or regular expenses. That should come from checking. Always prioritize paying your employees on time—it’s the law.
I recommend saving enough for three months of payroll and another three months of general expenses. Keep these in separate accounts. You and your partner should also consider setting fixed salaries and only adjusting based on business performance.