You need cash reserves for your business. Why? If business is slow, you need money to pay your operational costs. Without cash reserves, if your income dries up, you might default on your obligations.
In Shoe Dog, Phil Knight (CEO of Nike) mentioned the trouble of near zero cash flow. Namely, banks constantly threatened to pull back on loan offers because of his company’s situation. Further, as an accountant, he discovered that, for any business, near zero cash reserves indicated for potential business failure.
I’m learning this lesson now.
You can build up cash reserves the same way you build up retirement savings. You pay yourself first, putting a little bit aside every month. Here’s a good article on building your cash reserves by Marco at Factor This!.