Definition
A cash buffer policy sets the minimum cash balance the business will maintain to absorb shocks and avoid liquidity crises.
Formula
Minimum cash = target months of net burn * monthly net burn
Example
If target buffer is 3 months and net burn is $200k, minimum cash is $600k.
How to use it
- Set buffers based on revenue volatility and access to capital.
- Revisit the buffer after major headcount or pricing changes.
Common mistakes
- Using a fixed dollar buffer while burn rate changes.
- Assuming revolver availability is always fully accessible.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Cash Buffer Policy" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Cash runway: how to estimate burn, break-even, and survival time) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Investment Decision Calculator: Evaluate an investment using NPV, IRR, discounted payback, and profitability index from simple cash flow assumptions.
- Profitability Index Calculator: Calculate profitability index (PI) from discounted cash flows and estimate the max investment for a target PI.
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- Pre-money vs Post-money Valuation Calculator: Convert between pre-money and post-money valuation and estimate investor ownership from a financing round size.
Guides
- Cash runway: how to estimate burn, break-even, and survival time: A practical guide to runway: net burn, gross profit, break-even revenue, and how to avoid common cash planning mistakes.
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.