How many months of cash should a therapy practice keep in reserve?
Count reserves in months of fully-loaded spend, not dollars: cash on hand divided by a real month's outflow, payroll and employer taxes and rent and software and the owner's own draw included. Two months is the floor below which a single bad event forces a rushed decision; three gives room to respond deliberately. The number that matters is the denominator: most owners quote reserves against a flattering, incomplete version of their monthly spend and hold half the cushion they think they do.
The formula, and the denominator trap
Months of runway = cash the practice can actually spend ÷ fully-loaded monthly outflow. The right-hand side is where reserves get overstated: it must include payroll WITH employer taxes, rent, software, insurance, the quarterly tax set-aside amortized monthly, and the owner’s own draw, because in a real crunch the owner still needs to eat. A practice holding $40,000 against a true $22,000 month has 1.8 months, not the “several” the bank balance suggests. Cash already spoken for (accrued PTO, the next tax payment) is not reserve.
What the reserve is actually for
Generic small-business advice imagines slow receivables. A private-pay practice collects near session time, so that is not its shock. Its shock is a clinician giving notice: revenue from that caseload stops within weeks, while rent, admin payroll, and the replacement search keep running for the three to six months a credentialed hire takes. The reserve is what lets the practice hire the RIGHT replacement instead of the fastest one. What a departure actually costs →
Above three months
Beyond roughly three months of fully-loaded spend, additional cash is a choice, not safety: it can fund a hire ahead of demand, a rate-increase cushion, or the owner’s distribution, and holding it idle has a cost too. Practices with seasonal dips (the August and December troughs most therapy practices see) reasonably run the top of the range going into them and the bottom coming out.
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