What is a minimum cash balance?

A minimum cash balance is the lowest bank balance a business agrees it should hold at any point, so it can cover payroll and bills through the gaps between customer payments. It is an operating floor, not a savings goal.

How it is set

Size it several ways and take the one that covers all of them:

  • Weeks of fixed costs: payroll, rent, loan payments, insurance and contracts, converted to a weekly figure. Two to four weeks is a common starting range.
  • The worst outflow week: the week when payroll, rent and a tax remittance land together. The minimum should never be lower.
  • Customer concentration: what goes missing if the biggest customer pays a month late.
  • Lender covenants: a required minimum balance is a hard floor. Sit above it, not on it.

A minimum cash balance is different from a cash reserve. A reserve is money set aside for a downturn or an opportunity, usually measured in months and often held separately.

Worked example

MethodCalculationResult
Two weeks of fixed costs2 × $9,000$18,000
Three weeks of fixed costs3 × $9,000$27,000
Worst outflow weekPayroll $14,000 + rent $4,500 + tax $6,000$24,500
Lender covenantLine of credit requirement$15,000

Two weeks ($18,000) does not cover the worst week ($24,500), so it is too low. Three weeks ($27,000) covers every test. The client agrees a round $30,000, and it becomes the floor line on the 13-week forecast.

Common mistakes

  • Treating it as a target. Cash should usually sit above the minimum, not at it.
  • Setting it below the worst week. One slow week of collections then means a missed payroll.
  • Setting it at the covenant. One bad day puts the loan in breach.
  • Never revisiting it. New hires, a new lease or a new loan all change the number.

Related terms

  • 13-week cash flow forecast: A 13-week cash flow forecast is a week-by-week projection of the cash coming in and going out of a business over the next quarter, starting from today's bank balance.
  • Cash runway: Cash runway is how long a business can keep operating before it runs out of cash if nothing changes.
  • AP aging (accounts payable aging): An accounts payable (AP) aging is a report that lists unpaid supplier bills grouped by how long they have been outstanding or how soon they are due.

Further reading