"How much cash do we need?" is one of the questions accountants hear most, and one of the hardest to answer with a single number. Too low, and one late customer means payroll is at risk. Too high, and money sits idle that could be paying down debt or growing the business.
The useful answer is a minimum cash balance: a floor, agreed with the client, that the bank balance shouldn't drop below in any week. It's the line on every 13-Week Cash Forecast, and it turns a forecast from a table of numbers into a warning system.
Minimum balance vs reserve
These are two different ideas, and clients often mix them up:
- Minimum operating balance: the lowest the bank should go week to week, covering the gaps between customers paying and bills going out. Usually measured in weeks.
- Cash reserve: money set aside for a downturn, an emergency or an opportunity. Usually measured in months, and often held separately.
This guide is about the first. It's the one a weekly forecast tests.
Four ways to size it
1. Weeks of fixed costs
Add up the costs that have to be paid whatever sales do: payroll and source deductions, rent, loan payments, insurance, software and other contracts. Convert to a weekly figure. Two to four weeks of fixed costs is a practical starting range for many small businesses.
2. The worst outflow week
Look through the next 13 weeks for the week with the biggest payments, usually when payroll, rent and a tax remittance land together. The minimum should never be less than that week. If it is, one slow week of collections leaves the client short.
3. Customer concentration
If one customer accounts for a large share of revenue, ask what happens if they pay a month late. The larger their typical outstanding balance, the higher the minimum should be.
4. Lender covenants
Some loans and credit lines require a minimum balance or liquidity ratio. That's a hard floor. The operating minimum should sit comfortably above it, not on it.
A worked example
A fictional design agency, Orchard Lane Studio, has 12 staff. Its fixed costs work out to about $13,500 a week: payroll of $22,000 every two weeks ($11,000 a week), rent of $6,000 a month (about $1,385 a week) and around $1,115 a week of software, insurance and loan payments. One client makes up about 30% of revenue, and the bank's line of credit requires a $25,000 minimum balance.
| Method | Calculation | Result |
|---|---|---|
| Two weeks of fixed costs | 2 × $13,500 | $27,000 |
| Three weeks of fixed costs | 3 × $13,500 | $40,500 |
| Worst outflow week | Payroll $22,000 + rent $6,000 + sales tax remittance $9,000 | $37,000 |
| Biggest client paying late | Their typical outstanding balance | $24,000 |
| Lender covenant | Line of credit requirement | $25,000 |
Two weeks of fixed costs ($27,000) wouldn't cover the worst week ($37,000), so it's too low. Three weeks ($40,500) covers it, sits well above the covenant, and rounds to a number the client can remember. The agreed minimum is $40,000.
The concentration risk is worth a note too: if the big client paid a month late, about $24,000 would be missing. In the quarter when that client's contract is up for renewal, the agency agrees to hold a higher floor of $50,000.
Choosing the number
- Start from fixed costs, two to four weeks.
- Check it covers the worst week. If not, raise it.
- Add for concentration and seasonality. Lumpy revenue needs a higher floor.
- Stay clear of covenants. The minimum should trigger action well before the bank does.
- Round it. $40,000 is a number the client remembers; $38,640 isn't.
- Write down why. "About three weeks of fixed costs, and enough for the week payroll, rent and sales tax coincide" is a sentence that survives a change of bookkeeper.
Using it in the forecast
In a 13-week forecast, the minimum becomes a line on the chart. Three numbers come from it each week: the lowest point and its week, the headroom above the minimum at that point, and the first breach, if any. Those are the headline of every weekly update. How to build the forecast is covered in How to build a 13-week cash flow forecast for a client, and the weekly routine in Forecast vs actual: running the weekly cash forecast update.
When a breach shows up weeks ahead, the client has options: chase a large invoice early, move a purchase, draw on a credit line before it's urgent. Found the week it happens, they have none.
Common mistakes
- Using a month-end balance. Cash can dip far below it mid-month, the week payroll goes out.
- Counting the credit line as cash. It's a backstop, not a balance. Track the two separately.
- One number forever. Fixed costs grow with every hire. Review the minimum at least yearly.
- Setting it without the client. A minimum the owner hasn't agreed to won't change what they do.
Frequently asked questions
How much cash should a small business keep in the bank?
Enough to cover its fixed costs through the gaps between customer payments, plus a buffer for things going wrong. A practical starting point is two to four weeks of fixed costs as a minimum operating balance, and never less than the largest single week of payments. A longer-term reserve of several months is a separate goal.
What is the difference between a minimum cash balance and a cash reserve?
A minimum cash balance is the operating floor: the lowest the bank balance should go week to week. A cash reserve is money set aside for emergencies or opportunities, often measured in months of expenses. Both are useful, but they answer different questions.
What fixed costs count toward a minimum cash balance?
Costs that have to be paid whatever sales do: payroll and source deductions, rent, loan payments, insurance, software subscriptions and other contracts. Variable costs such as materials usually fall when sales fall, so they're less of a risk.
How often should the minimum cash balance be reviewed?
At least once a year, and whenever something big changes: new hires, a new lease, a new loan, or a change in how concentrated the customer base is.