How Strong Are Your Business Finances? Can You Pass the 3 to 6 Test?

The “3 to 6 test” is simple.

Set aside 3-to-6 months’ fixed costs as a cash cushion for your business. That’s the amount recommended by Mark L. Mayoka, a CPA who advises small businesses on how NOT to go out of business.

The “3 to 6 test” is a rule of thumb. If you have that amount set aside, it can liberate you as the business owner. It can be the catalyst for growth.

As Mayoka writes in his book, “Financial Crisis Planning for Small Business,” having such a cash cushion:

“allows you to focus on forward-looking business development instead of struggling just to keep the doors open for business. In these times of intense and widespread economic stress, the lean and careful not only survive, but thrive as well. Opportunities abound in times of crisis if you know how to take advantage of them. There is an old Chinese saying that luck is being prepared when the right opportunity presents itself.”

There’s a lot of talk these days about how recessions and bad economies are times of opportunity. I agree with that sentiment. But I’m bothered by the fact that few commentators and coaches point out that your business also has to be healthy enough to jump on opportunities. You can’t seize opportunities if every day is a struggle to make payroll and you’re living on the razor’s edge between staying afloat or going under.

So, let’s assume you are able to set aside 3-to-6 months’ fixed costs. You now have your business’s rainy day fund. Depending on the size of your business that could add up to a lot of money – six figures. So the question becomes: what do you do with that money? Here are 4 tips:

(1) Do not just leave that cash in a non-interest bearing checking account. Invest it somewhere. Even a low-interest savings account or bank CD could earn thousands of dollars per year in interest. That’s thousands of dollars in new sales your team doesn’t have to go out and get.

(2) Use large deposits as leverage with your bank. Get your bank to waive fees. When you have significant money with them, you have negotiating power.

(3) Pay attention to FDIC coverage rules. The rules can be a little complex, and what I’m about to say is a bit of an oversimplification, but here goes: your deposits are insured only up to $250,000 per bank. Any amounts over the limit are at risk of being lost if the bank should fail. If you have your business checking account with the same bank as your rainy day fund, you could easily exceed the $250,000 insurance coverage. It gets even trickier if your business is a sole proprietorship. Sole proprietors’ business accounts may be combined with personal accounts for FDIC insurance calculation purposes. In other words, you may have less coverage than you think if you’re a sole proprietor.

Go to the FDIC website and find out whether your deposits are fully covered in your bank. If you are not covered, move some of your money to other banks. (For more information, see my earlier article on FDIC coverage for small businesses and sole proprietors.)

(4) Consider short-term U.S. Treasury bills as an investment vehicle. This is one of Mayoka’s recommendations as a safe alternative.

Just remember, a 3-to-6 month cash reserve fund will have you sleeping peacefully at night. You’ll be in a position to think and act strategically – instead of jumping from one tactical crisis to another. And that’s when you will have the mindshare to devote to new opportunities, and the cash at hand to act on your plans.

Editor’s note: this article was originally published at the American Express OPEN Forum and is reprinted with permission.


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

11 Reactions
  1. Hell no I can’t past that test. I don’t know many who could unless your business was really small. If somebody does have that amount it is probably in an unused line of credit.

  2. i don’t think i can to say of the truth but yet it’s a useful lesson

  3. Hi Anita,

    This is again a one of many useful pieces of information that you have offered small businesses. It is a a very crude and simple fact that many entrepreneurs tend to distract from that in any business cash is king. Actually, the problem with 3-6 test is that it is highly dependent upon the kind of business a small business owner is and also the stage at which his business is right now. It would also be particularly useful if small business owners can educate themselves with the basic financial ratios to keep a timely check on the the liquidity and solvency positions of their companies.

  4. John Seiffer at

    The amount seems high to me. 3-6 months expenses makes sense for a person where in a dire emergency (health crisis or job loss) you could go a while with no income at all. But that’s unlikely in a business.

    Having said that, the idea of what the proper amount of cash reserve does to your thinking is stupendous. It does allow you to think strategically, to take advantage of opportunities and to be less reactive. These are all good things and impossible without some kind of cash reserves.

    What is the proper size for your business? I’d suggest it depends on what your normal revenue fluctuations look like (size and duration) in relation to your fixed expenses, the availability of other resources that are outside your company, the nature of your debt, and of course your personal goals. All this is to say that one size does not fit all – but the concept is very valid.

  5. You’re right on the money. Any business owner who can pass that test should be sleeping like a baby. I would guess that very few companies can pass the test, but the principle is rock solid. Thanks Anita.

  6. The 3-6 rule seems to be great in theory Anita but I have a client who ran by this rule and it meant that he never really got into any long term strategic options because whenever he ran below the buffer mark he literally stopped spending on future initatives until he’d built the bank balance up again. He is still successful today but over time the money ran the business because it was the determinant as to whether things would be done rather than the strategy and vision for the business.
    So I would add the thought that the 3-6 rule is really great but should be subject to the vision and strategic direction of the business because the timing cash flow not always in sync with long initiatives in a business

  7. Anita,

    Some day, my checking account balances will stay high enough to get an interest bearing checking account.

    Until then, I am certainly open to the communities suggestions on how to get there.


    The Franchise King
    Joel Libava

  8. How Strong Are Your Business Finances? Can You Pass the 3 to 6 Test?: The “3 to 6 test” is simple.
    Set aside 3……

  9. Great article Anita. Interesting comments too. Its expensive to create a cash cushion regardless of the business entity you operate under. Cash cushion has to come first then capital for expansion. Most entrepreneurs, myself included, wanna go so fast its hard to wait. I follow, cause I’ve learned the hard way, expect the best, plan for the worst. Cash cushion is right on with that!!