Building cash reserves during profitable periods is what prevents crises during downturns or unexpected events. Most businesses spend or distribute profits during good times and lack resilience when conditions change.
How much to keep
Minimum 6 months of operating expenses. Better: 12 months for established profitable businesses. In specific high-risk situations (volatile industry, dependent on few customers): even more.
Where to hold it
Business savings account separate from operating account. Some in money market for slightly higher yield. Treasury bills for very large reserves.
When it pays off
Economic downturns (you survive while competitors fold). Major customer loss (time to adapt). Founder illness (business continues). Unexpected opportunities (you can act when competitors can't).