Ask ten advisers and you will hear "three months of expenses" ten times. It is a reasonable starting point and a poor answer, because it ignores the two things that actually determine how much cash a business needs: how volatile its income is, and how quickly its costs can be turned off.
Start with fixed costs, not total costs
The reserve exists to cover what you cannot stop paying. Rent, insurance, core salaries, software, finance repayments. Variable costs move with revenue and largely take care of themselves. Work out the monthly fixed number first, because that is what a quiet quarter actually costs you.
Then add the obligations that are not expenses
This is where most businesses come unstuck. GST collected is not your money. PAYG withheld from wages is not your money. Superannuation accrued but not yet paid is not your money. A business can look comfortably cash-positive and still be one BAS away from a problem, because the reserve was measured against expenses and the ATO obligations were never counted.
Adjust for how lumpy your income is
A business on retainers with thirty-day terms needs less buffer than one that invoices on project completion and waits ninety days. If your three largest clients are more than half your revenue, the reserve is not really about months of expenses at all — it is about surviving the loss of one of them long enough to replace it.
A practical way to hold it
Separate accounts beat discipline. One operating account, one account that GST and PAYG move into the day they are collected, and one genuine reserve that is awkward to raid. The mechanism matters more than the target, because a target you can spend is not a reserve.
When holding more is the wrong answer
Cash sitting idle has a cost too. If the business is carrying expensive debt, or turning away work because it cannot fund the equipment to deliver it, a large reserve may be the most expensive asset on the balance sheet. That trade-off is worth modelling rather than assuming.
The honest answer is that the right reserve is specific to your cost base, your debtor terms and your client concentration. Bring us three months of actuals and we can work out the number rather than guess at it.