Liquidity reserve
Liquidity reserve is money your business keeps in cash or near‑cash so you can pay bills, payroll, taxes, and handle surprises even if customers pay late or sales dip. It’s a practical cash‑management tool, not a special tax or legal category.
Accounting view
A liquidity reserve isn’t a unique GAAP account. It usually sits within cash and cash equivalents; legally restricted cash is tracked separately and doesn’t count as your reserve.
The reserve should be easy to access and low‑risk, so it’s available when needed. Many firms combine an on‑hand cash buffer with a backup source of liquidity for larger shocks.
Common ways to hold a liquidity reserve:
- Cash in a business checking account for immediate payments.
- Savings or money market accounts for quick access.
- Short‑term, low‑risk marketable securities (e.g., instruments that can be sold quickly).
- An undrawn, committed business line of credit as a backup source of cash.
