How much cash buffer does a small business need?

What a buffer is

A cash buffer is the minimum bank balance you are not willing to fall below. It is not a target to spend down to. It exists so that a late payment, an unexpected bill or a quiet month does not become an emergency.

There is no single right figure. It depends on how predictable your income is, how large and fixed your costs are, and how quickly you could raise cash if you had to.

A simple method

1. Add up your fixed monthly costs: payroll, rent, insurance, software, loan repayments and anything else you must pay whatever happens.
2. Convert it to a weekly figure by multiplying by 12 and dividing by 52.
3. Choose how many weeks of those costs you want to be able to cover with no income at all.
4. Multiply.

£22,000 a month is about £5,080 a week. Four weeks of cover is a buffer of about £20,300. Six weeks is about £30,500.

Choosing the number of weeks

Think about what would push you below the buffer, and how long recovery would take.

• If a few large clients make up most of your income, a longer buffer protects you from one of them paying late.
• If your income is steady and contracted, for example retainers, you may be comfortable with less.
• If you could draw on a facility or shareholder funding quickly, you may need less cash on hand. If you could not, more.
• Seasonal businesses should look at their quietest months, not their average.

Using it in a forecast

Draw the buffer as a line on your cash forecast. The weeks where the forecast dips below the line are the ones to plan for. That turns the buffer from a number on paper into an early warning. In Cadence you set the buffer once in Settings and the forecast, the alerts and the overview all use it.

Review the number when something material changes: a new hire, a lost client, a new lease.

General information, not financial advice. Your accountant can help you choose a level that suits your business.