What is meant by a cash reserve?

A cash reserve refers to a savings buffer specifically maintained to address unexpected expenses or financial challenges that arise in the course of running a business. This reserve serves as a safety net, allowing a business to manage unforeseen costs such as repairs, emergency situations, or fluctuations in cash flow without jeopardizing operational stability.

Having a cash reserve is crucial for small businesses, as it enhances financial flexibility and can prevent the need for high-interest loans or credit card usage during tough times. The other options, such as funds allocated solely for investments or bonuses, do not capture the essence of a cash reserve's purpose. Their focus narrows down to very specific uses, whereas a cash reserve is versatile and meant for any unforeseen needs, making it a vital tool for effective financial management in small businesses.