How Much Cash Should an HVAC Company Keep in the Bank?

“How much cash should I keep in my HVAC business?”

It’s a question I get from HVAC owners, especially after a strong few months when there’s finally a healthy balance sitting in the bank.

The simple answer you’ll hear is two or three months of operating expenses.

I don’t think that’s a bad place to start.

But as a CFO, I wouldn’t tell an HVAC owner that $300,000 is enough cash simply because the company spends $100,000 a month.

I’d want to know a lot more about the business first.

• Payroll and payroll taxes.
• Rent or mortgage.
• Truck payments.
• Insurance.
• Software.
• Office and management salaries.
• Debt payments.
• Utilities.
• Marketing commitments.
• How seasonal is it?
• How quickly do customers pay?
• How large is payroll?
• How much debt does the company have?
• Are there tax payments coming?
• Is the owner planning to buy three trucks next month?
• Does the company have a line of credit available if something unexpected happens?

Two HVAC companies doing exactly the same revenue can need very different amounts of cash.

So rather than starting with a percentage or a rule of thumb, here’s how I think about it with clients.

This is one piece of managing cash flow in a home service company. The full guide covers the forecast, seasonality, and the weekly rhythm that keeps the reserve intact.

Start With What It Actually Costs to Run the Business

Before deciding how much cash should stay in the bank, you need to know what it actually costs to operate the company every month.

Not approximately.

I want to know what the business is committed to paying regardless of whether the month is great or terrible.

That includes things like:

• The company changes.
• Payroll grows.
• You add trucks.
• Debt changes.
• You hire managers.
• Revenue grows.

And all the other overhead that continues whether the phones are ringing or not.

Then I want to understand the expenses that move with revenue, including equipment, materials, commissions and other direct costs.

This gives us a starting point.

If an HVAC company requires $250,000 a month to operate, keeping $100,000 in the bank obviously means something very different than it does for a company that operates on $75,000 a month.

This sounds basic, but I’m always surprised by how many owners can tell me exactly what’s in the bank today but can’t tell me what it takes to operate the company for a month.

You need both numbers.

One judgment call to make before you add anything up: where your field labor sits. If your techs are in cost of goods sold — which is where most of you have them — leave them out of this number and know you’re being conservative. If you carry field labor in overhead, your number comes out roughly double. Pick one, write it down, and stay consistent. Switching between the two is how owners end up with a reserve target that’s off by half.

Seasonality Changes the Answer

This is a big one for HVAC.

A company can come out of June, July and August with a lot of cash.

That doesn’t necessarily mean all of that cash is available.

Some of it may need to carry the company through the slower period between cooling and heating seasons.

I wrote separately about shoulder season and what I’m telling HVAC clients to look at before the slowdown hits. Prepare your cash position for shoulder season.

The important point here is that the cash reserve decision shouldn’t be made by looking only at today’s bank balance.

I want to know what the next 60 to 90 days are likely to look like.

An HVAC company in a market with a significant fall shoulder season may need a larger cash cushion coming out of summer.

Another company may operate in a climate where demand is relatively consistent throughout the year.

Those two businesses shouldn’t necessarily have the same cash reserve policy.

The same company may even need different levels of cash at different points during the year.

That’s why I prefer a forecast over a fixed rule.

How Quickly Do You Get Paid?

This can completely change the answer.

A residential HVAC service company that collects by credit card at the time of service has a very different cash cycle from an HVAC contractor doing a significant amount of commercial work.

If you perform the work today and collect the money today, there isn’t much of a gap.

If you perform the work today, pay your technicians Friday, pay for the equipment and materials, and then wait 30, 45 or 60 days to get paid, the company has to finance that gap.

That requires working capital.

And as the company grows, the amount of cash tied up in that gap can grow with it.

This is one of the strange things about growth.

A company can be profitable and growing quickly and still run into cash problems.

More revenue can mean more payroll, more equipment, more materials and more receivables that have to be funded before the cash actually arrives.

So when I’m thinking about how much cash an HVAC company should keep, I want to understand not just how much revenue it generates, but how quickly that revenue turns into cash.

John Wilson made this concrete when I was on Owned and Operated with him. Wilson Companies’ restoration division does about $2 million a year and gets paid by insurance carriers on roughly 90-day terms. That one division carries more accounts receivable than $50 million of their residential service work. Same company. Two departments. Completely different cash requirements. That episode is now out: Growth Is Eating Your Cash.

His read on it is worth stealing. As long as the core of the business converts cash fast, he can afford to carry a slower-paying department if the margin justifies it. Restoration runs around 70% gross margin, so it clears that bar. New construction gets paid just as slowly at a fraction of the margin, which is why that’s a different conversation entirely.

Look at What’s Coming, Not Just What’s in the Bank

Another reason I don’t love simple rules is that the bank balance doesn’t tell you what’s about to happen.

Maybe the company has $500,000 sitting in the bank.

Looks great.

• But what if $125,000 of payroll is coming out next week?
• What if there’s a $75,000 tax payment due?
• What if you’ve already committed to buying two trucks?
• What if an annual insurance payment is coming next month?

Suddenly that $500,000 looks very different.

This is why I like looking at a simple 90-day cash forecast.

I don’t need it to predict the exact bank balance 90 days from now.

It won’t.

I want it to show us the major cash inflows and outflows we already know about so we can make better decisions today.

If we’re talking about taking a $150,000 owner distribution, I want to see what happens to cash afterward.

If we’re talking about buying another truck, same thing.

If we’re hiring three technicians, what does that do to payroll while they’re ramping up?

A bank balance is a snapshot.

The decision about how much cash to keep should be based on where the company is going.

A Line of Credit Matters Too

Available credit is another part of the equation.

Suppose two otherwise similar HVAC companies each have $300,000 in the bank.

One has an unused $500,000 line of credit and a strong banking relationship.

The other has no line of credit.

Those companies don’t have the same liquidity.

I’m not suggesting that a line of credit should replace a reasonable cash reserve.

It shouldn’t.

But access to capital gives a business another option if something unexpected happens.

Maybe a major customer pays late.

Maybe several trucks need repairs at the same time.

Maybe the weather doesn’t cooperate.

Maybe an opportunity comes along that requires cash quickly.

The company with available credit has another tool.

The company without it has whatever is sitting in the bank.

I would much rather establish a line of credit when the company is doing well and doesn’t need the money than start calling banks when cash is already tight.

Here’s the trap. Without a cushion you borrow in the slow months and pay it down in the good ones, then borrow again next year. You never get ahead of it. You’re financing your own seasonality at 9% and calling it a cash flow strategy. The reserve is what breaks that loop.

A line covers timing. A reserve covers being wrong. You want both, and you want the line in place before you need it, because banks price you better when you obviously don’t.

So How Much Cash Should an HVAC Company Actually Keep?

Here’s the ballpark I use:

I have a client running about $11 million a year who keeps right around $1 million in the bank. He doesn’t take draws. That’s not a growth strategy; it’s a safety net. If he loses a big customer, or the economy turns, or something lands that nobody saw coming, he has room to think instead of react.

Notice what those rows work out to: 10% to 15% of revenue. If you want the shortcut instead of the expense calculation, use 15% when your collections are slow and 10% when they’re fast.

If you’re looking for a starting point, two to three months of operating expenses is a reasonable rule of thumb to consider.

But I wouldn’t stop there.

Let’s say an HVAC company spends approximately $200,000 a month.

Using the simple rule, that would suggest somewhere around $400,000 to $600,000 of cash.

Is $400,000 enough?

Maybe.

Is $600,000 too much?

Maybe.

Now I want to look at the business.

Suppose it’s primarily residential service and replacement, collects quickly, has very little debt, has an unused line of credit and is heading into a strong part of the year.

I may be comfortable toward the lower end.

Now take another $200,000-a-month HVAC company.

It has significant commercial receivables, no line of credit, a large tax payment coming, several vehicle purchases planned and it’s heading into shoulder season.

I’m going to look at that very differently.

The operating-expense rule gives us a starting point.

The business tells us the answer.

I Like Having a Minimum Cash Floor

One thing I do like is establishing a number that we don’t casually go below.

Call it a minimum cash balance, cash floor or whatever terminology works for you.

The name isn’t important.

The idea is.

Instead of looking at the bank account every month and asking, “How much can I take out?”, we decide ahead of time what amount should remain in the business based on its needs.

Maybe that number is $400,000.

If the company has $650,000 after considering upcoming obligations, now we can have a conversation about what to do with the excess $250,000.

Take a distribution?

Pay down debt?

Buy equipment?

Keep some of it because we expect a slowdown?

There isn’t necessarily one correct answer.

But at least we’re making the decision after protecting the amount we’ve determined the business needs.

I like that a lot better than managing distributions based on whether the bank balance happens to look high that week.

If You’re Nowhere Near the Number

Don’t try to get there in a quarter. You’ll starve the business.

Move a fixed percentage of every peak-season deposit into a separate account, weekly, and leave it alone. Ten percent works for most shops. The separate account matters more than the percentage — money sitting in operating gets spent, every time. Pick one that takes a day to move money out of. The friction is the feature.

Then stop treating the reserve as a balance you check and start treating it as a line. That’s your cash floor: the number where you stop making casual decisions. Above it you can buy the truck. Below it, every dollar already has a job.

More Cash Isn’t Always Better Either

There’s another side to this.

I don’t automatically want an HVAC company accumulating cash forever.

If the business genuinely needs $500,000 and has $1.5 million sitting in checking with no plan for it, we should probably talk about that too.

Could some debt be paid down?

Does the company need to invest in equipment or people?

Should the owner take a distribution and invest outside the business?

Is there a better place for some of that cash while still keeping it appropriately available?

The goal isn’t to build the biggest possible bank balance.

The goal is to keep enough cash in the company to operate comfortably, handle the normal ups and downs of the business and avoid being forced into bad decisions because cash suddenly gets tight.

The Number Should Change as the Business Changes

One last thing.

If you decide today that your HVAC company should maintain $400,000 in cash, that doesn’t mean $400,000 is the answer forever.

• The company changes.
• Payroll grows.
• You add trucks.
• Debt changes.
• You hire managers.
• Revenue grows.

Your mix between residential and commercial work may change.

Maybe you go from $4 million to $8 million in revenue.

The cash reserve that made sense for the $4 million company may not make sense anymore.

I’d revisit the number periodically, particularly when the business has grown significantly or its cost structure has changed.

There Isn’t One Magic Number

So, how much cash should an HVAC company keep in the bank?

Two to three months of operating expenses is a reasonable place to start the conversation.

But that’s all it is, a starting point.

I want to understand the company’s monthly expenses, seasonality, collection cycle, debt, upcoming obligations, access to credit and plans for growth.

Then we can determine a minimum cash balance that actually makes sense for that business.

That’s much more useful than applying the same rule to every HVAC company.

And once you know that number, a lot of other decisions become easier.

You know when the company truly has excess cash.

You can make owner distributions more thoughtfully.

You can evaluate trucks and other large purchases without guessing.

And you have a much better idea of whether the business is financially prepared for the next few months.

If you own an HVAC, plumbing or electrical company and you’re trying to figure out how much cash should stay in the business, this is the kind of conversation I have with clients every month.

We look at the financials, cash flow and what’s coming so those decisions aren’t based on today’s bank balance alone.

If you’d like to talk about your business and see if I might be able to help, you can schedule an introductory call here: Schedule Here.

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