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.
Measured as
Minimum cash = target months of net burn * monthly net burn
Misused when
- Using a fixed dollar buffer while burn rate changes.
- Assuming revolver availability is always fully accessible.
Operator takeaway
- Set buffers based on revenue volatility and access to capital.
- Revisit the buffer after major headcount or pricing changes.
- Tie Cash Buffer Policy to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash runway: how to estimate burn, break-even, and survival time if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Cash Buffer Policy belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
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.