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The Master’s Minute – Cash Reserves: The Reasons for Liquidity

April 15, 2025 by Garrison R. North

Master's Wealth Management logo over a stack of 100 dollar bills.

For any business owner, cash flow is always a topic that is top of mind. Between managing inventory, accounts receivable, and lines of credit, the old adage stays true “cash is king!”  

One of the challenges faced by business owners is how to balance the cash needs of the business with their personal financial goals, including cash reserves.  

A well-run, privately held business is likely the best investment available to those who own such businesses. Sometimes, it can be hard to justify taking cash from the business to fulfill personal financial goals.  

However, this can lead to business owners having many assets, but very little liquidity. This blog will talk about the different forms of liquidity you should be aware of and take into consideration while planning to ensure that you have sufficient cash reserves.  

Do you have a plan for all three?  

Defining Liquidity, Illiquidity, and Finding Balance 

So, what is liquidity in a business sense? Liquidity is best defined as dollars that you can get to easily.  

Cash in the bank is liquid, equity in a business real estate property is less liquid, and the enterprise value of a privately held business is, for the most part, completely illiquid.  

Balancing liquidity needs for a business owner can provide a buffer for tough times in the business, as well as diversification alongside business assets. 

Cash Reserve Types 

When thinking about how much cash reserves a business should have, we can break down this need into 3 different categories: 

  • Opportunistic Liquidity 
  • Protective Liquidity 
  • Long Term Liquidity 

Opportunistic Liquidity  

This bucket is intended for future investments back into your business, cash reserves that foster growth opportunities. It may be an expansion, acquisition, or equipment investment to further your growth.  

These reserves can exist in the form of cash (either on your balance sheet or in your personal name) or in the form of credit (available collateral on assets or general line of credit availability).  

This will allow you to take advantage of future investments that present themselves, as they do not always come when you have planned for them. 

Protective Liquidity 

Think of this bucket as your emergency bucket.  

If your business goes through a difficult year, or your expenses are higher, this emergency cash reserves bucket provides a backup source to draw off of until cash flow recovers.  

This reserve is typically cash, either on your balance sheet or in your personal name. The amount of protective liquidity largely depends on historical volatility of cash flows and the amount of flexibility (or lack thereof) in your business to reduce expenses if needed. 

Long Term Liquidity 

This bucket contains the dollars you take out of your business for long term growth and diversification.  

Many businesses can afford to take a small amount of profit from their businesses on a regular basis and move it to their personal balance sheet for investment in stocks and bonds. This bucket provides you with long term appreciation potential outside of your business and also reduces your reliance on the business to fund your life after you exit.  

Funding the Cash Reserve Buckets 

As you think about the management of your cash flows, do you have a plan to fund all of these buckets? Creating intentional funding mechanisms maximizing optionality and provides a source of protection for the inevitable ups and downs of business cash flow.  

If you would like to have a discussion about your current cash reserves, how much you should have in these buckets for your situation, or anything else, we’re eager to help. Contact our team, today! 

Filed Under: Business Owners, Master's Minute

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