Building cash reserves and preparing for the future of your dental practice.

You’ve done the work to analyze your numbers and understand your cash flow. So… what’s next? It’s time to build your cash reserves — the safety net that keeps your practice stable when unexpected challenges arise. This article will talk about why reserves matter, how much you need and practical ways to start building them for your future.

Research has found that cash flow issues are responsible for most small business failures — but cash reserves can make all the difference. Reserves act as your financial cushion, helping you navigate emergencies, seasonal slowdowns and financial uncertainty. Think about those predictable slowdowns in your practice, like the start of the year or when kids go back to school in the fall. Having cash reserves can help you cover expenses during these times without disrupting operations or adding stress.

So, how much should you aim for? The general recommendation is three to six months of operating expenses, but this depends on your comfort level and practice needs.

Here’s how you calculate it. Start with your annual collections and determine the costs of generating that income from your most recent profit and loss statement. Add in your annual loan payments, then subtract non-cash expenses like depreciation and amortization. Divide this number by 12 to get your monthly expenses. Multiply that by 3 or 6 to set your cash reserve goal.

If a three- to six-month reserve feels out of reach, start small. Break it down by day: take your annual expenses, divide by the number of production days, and build your reserves one day at a time.

Now, how do you start setting money aside for your reserves?

Cut unnecessary expenses and redirect the savings into your reserve account. Get your team involved — make it a contest. Ask for cost-saving ideas, and reward the winner with a perk, like leaving early at the end of the workweek or a free lunch.

You can also automate the process. Set up an automatic transfer at payroll to move a fixed amount into savings. If a month exceeds your average income, use the extra cash to build your reserves.

Now let’s talk about where to keep those reserves.

Your reserve account needs to stay liquid, so consider options like savings accounts, money market accounts, or short-term CDs that align with your risk tolerance and financial goals. As your reserves grow, consider strategies like CD laddering, where funds are split across CDs with staggered maturity dates to give you regular access to cash.

And here’s one more tool to consider: a business line of credit. Establishing a line of credit when your practice is financially healthy may provide access to funds if you face unexpected expenses, subject to approval and specific terms. If you wait until you need it, you may not get the best terms or rates.

Reserves are also important for loan approval. Underwriters want to see that your practice can weather financial downturns without defaulting on payments.

Lastly, don’t forget to review your cash reserve goals periodically.

As your practice grows or changes, your needs will evolve. Make sure your reserves still align with your financial goals and adjust as necessary. Building cash reserves takes time and discipline, but the payoff is worth it. With a strong safety net in place, you’ll be better prepared for challenges and can support long-term stability. Start small, build consistently, and work with trusted advisors like your banker, CPA, or financial consultant to achieve your reserve goals. If you need help figuring out where to start or how to calculate your reserve target, reach out to your financial advisor or Commerce Bank representative opens in a new window. With cash reserves in place, you’re building more than a safety net — you’re building confidence in your practice’s future.