Niamh Cahalane has spent 14 years as a finance director in manufacturing and professional services. She has seen reserve funds built and misused across multiple business cycles.
What is wrong with the standard reserve fund advice?
The advice is not wrong, it is incomplete. Businesses are told to build three to six months of operating costs in reserve. But nobody specifies what that reserve is actually for, who can authorise its use, or under what conditions it gets rebuilt after drawdown. Without those answers, it is not a reserve — it is an unmanaged pool of cash.
Can you give a concrete example of how that goes wrong?
A manufacturing client built a reserve over three years from trading surplus. When a supply chain disruption hit, the board drew down half of it to cover short-term cash flow. There was no documented trigger for rebuilding it. Two years later, the reserve was still at half its intended level, and nobody had formally noticed.
Niamh Cahalane — A reserve without a governance policy attached to it is just cash with a polite label.
What should businesses do instead?
Define the reserve purpose in writing before the surplus is allocated. Specify the drawdown conditions, the replenishment timeline, and who holds accountability. That takes one board meeting, and it changes how the reserve actually functions.