A minimum cash balance is only useful if something warns you before you go below it.
Set a minimum cash buffer that covers your essential outflows for a period you can survive a shortfall, typically several weeks of payroll, rent, tax and debt payments, plus any minimum required by your lenders. Then test every week of your cash forecast against it, so a breach shows up weeks ahead rather than in the week it happens.
A 2016 JPMorgan Chase Institute study of US small businesses found the median firm held enough cash to cover only 27 days of its typical outflows if money stopped coming in. Most businesses run closer to the edge than their owners think.
Many businesses use the highest of the three.
| Essential monthly outflow | Amount |
|---|---|
| Payroll and employment taxes | 120,000 |
| Rent and utilities | 18,000 |
| Loan repayments | 12,000 |
| Sales tax or VAT (monthly average) | 20,000 |
| Total | 170,000 |
Covering six weeks of essential outflows needs roughly 170,000 × 6 ÷ 4.33, about 236,000. If the bank requires a minimum of 150,000 and the worst historical month was a net outflow of 210,000, the buffer would be set at 236,000, the highest of the three.
Undrawn overdraft or revolving credit can count toward the buffer, but only if it cannot be withdrawn at short notice and you are inside its covenants. Facilities tend to be cut exactly when you need them.
A buffer is a line on the forecast. Each week, compare every forecast week's closing cash with it and flag any week that falls below. A breach seen eight weeks out gives time to chase receivables, delay spending or talk to the bank. See how to build a 13-week cash flow forecast.
The method is the same in both countries. In the UK, remember quarterly VAT payments and PAYE when estimating peaks; in the US, quarterly estimated tax payments and payroll tax deposits. Lumpy tax payments are a common reason a buffer that looked comfortable is breached.
Work out DSO and the cash tied up in late payers. Free to use online.
The Cash Flow Forecasting & Liquidity Control System tests every week of a rolling cash forecast against your minimum cash buffer and lending covenants, and flags a breach before it lands. Excel, no macros, one-time price.
It is a common rule of thumb for small businesses, but a buffer based on your own essential outflows and worst historical period is more defensible and easier to explain to a board or lender.
Yes, if your business is seasonal. Set it higher ahead of known peaks in outflows, such as tax payment months or stock build before a busy season.
In an account you can reach the same day. Cash in a notice account or term deposit earns more but cannot be used at short notice, so only the instantly available balance counts toward the buffer.
Agree the response in advance: who is told, what spending is paused, which receivables are chased first and when the bank is contacted. Acting early keeps options open.
Last updated 18 October 2026. General guidance for finance teams; check it against your own policies, systems and local rules.