For most small business, cash reserves are a critical tool for meeting liquidity needs. Cash reserves provide a readily available means to pay employees and suppliers in normal times and are an important buffer to draw upon during adverse times. This is particularly true for small businesses with limited access to credit and other sources of liquidity. In other words, cash reserves are a key measure of the vitality and security of a small business.

In this inaugural report on the small business sector, the JPMorgan Chase Institute explores the financial lives of small business through the lens of cash inflows, outflows, and account balances. We find that, despite the importance of cash reserves, most small businesses hold a level of cash reserves that would provide an insufficient cushion in the face of a significant economic downturn or other disruption. Using a new data asset constructed from over 470 million transactions conducted by 597,000 small businesses from February to October 2015, our analysis shows that half of all small businesses hold a cash buffer large enough to support 27 days of their typical outflows.

This report also explores key industry characteristics that help explain the drivers of cash buffers. Additionally, it offers a new synthesis of publicly available data to begin to draw together a comprehensive view of the small business sector.

These findings are relevant to policy makers who seek to assist small businesses; to nonprofit organizations that coach small business owners; to financial services firms that help small businesses manage their liquidity; and to owners of small businesses who seek benchmarks for guidance in managing their own liquidity.

We hope this report draws attention to cash balances as an important issue, helps people better understand differences among small businesses, and helps in the development of smarter programs, products, and policies that enable small businesses to flourish.