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How Much Cash on Hand Is Too Much? And What Should I Do With It?

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This story appears in the January 2014 issue of Entrepreneur. Subscribe »

Are congratulations in order? Or perhaps you're just thinking positively--I like it! If you're in the enviable position of having an excess of cash on hand, you have the power to take advantage of opportunities to invest in your . But before we get to that fun topic, let me answer your first question.

Conventional wisdom holds that a business should have liquid assets (cash in and very liquid investments) equal to three to six months of operating expenses. That's a nice rule of thumb, but I like to separate cash into a monthly operating account and a contingency fund. Put simply, the operating account should carry a sufficient balance to cover the lowest cash-inflow month of the year for your business. (Seasonal businesses should have enough cushion to last through both their busy and slow seasons.) It's your contingency fund that should equal three to six months of operating cash.

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