Why a buffer matters
Most small business cash crises aren’t caused by losses. They’re caused by timing: a customer paying late, a quiet month running long, an unexpected repair, a tax bill larger than planned. A cash buffer turns those events from emergencies into inconveniences.
It also gives you choices. With a buffer, you can take a supplier’s early-payment discount, keep good staff through a slow patch, or say no to a bad deal because you’re not desperate for the cash.
How much is enough?
There’s no single right number, but a practical approach is to start with fixed costs — what the business must pay even if revenue stopped for a month:
- Rent and leases
- Core staff wages (not casuals)
- Loan and lease repayments
- Insurance, software, utilities
- Owner’s minimum drawings
Then choose a multiple based on your risk profile:
| Business profile | Suggested buffer |
|---|---|
| Steady income, many customers | 1 month of fixed costs |
| Some seasonality or a few large customers | 2 months |
| Strongly seasonal or highly concentrated income | 3 months, or enough to reach the next peak |
These are starting points, not rules. A seasonal cash flow plan will show your actual lowest point, which is the most accurate way to size a buffer.
How to build it
1. Automate a transfer
Set up an automatic transfer of a fixed share of receipts — say 5% of every deposit, or a set amount each week — into a separate buffer account. Automating it means it happens without willpower.
2. Front-load in the peak
Seasonal businesses should build the buffer hardest during their peak. Consider transferring a larger share in your busiest months and pausing contributions in the quietest ones.
3. Bank windfalls
Tax refunds, an unusually large job, the proceeds from selling old equipment — put a portion straight into the buffer.
4. Trim before you save
Review subscriptions, insurance and supplier contracts once a year. Savings found there can go straight to the buffer without affecting operations.
5. Separate tax money first
Your buffer isn’t your tax money. Set aside GST, PAYE and income tax in their own account first; the buffer comes from what’s left.
Where to keep it
- A separate business savings account at your bank — accessible within a day but not on your everyday card.
- Not in stock or equipment. Assets you’d need to sell aren’t a buffer.
- Not in term deposits you can’t break without delay, unless you’re holding more than you’d need in a hurry.
Rules for using it
A buffer only works if it’s used for the right things. Write down your rules:
- Use it for: timing gaps, genuine emergencies, short-notice repairs.
- Don’t use it for: routine spending, owner’s discretionary drawings, funding ongoing losses.
- Always rebuild it after drawing on it, before other discretionary spending.
Buffer plus standby credit: the two-layer approach
Even disciplined businesses find it hard to hold three months of fixed costs in cash, especially when growing. That’s where a second layer helps.
| Cash buffer | Standby facility | |
|---|---|---|
| Cost to hold | None beyond opportunity cost | Depends on the lender |
| Speed | Instant | Fast, once set up |
| Size | Limited by what you’ve saved | Based on turnover |
| Best for | Small, frequent surprises | Larger or longer gaps |
A standby line of credit, arranged while trading is healthy, lets you hold a smaller cash buffer without taking on more risk. You use the buffer first, and draw on the facility only if a shortfall is bigger or lasts longer than the buffer can handle.
Example: sizing a buffer for a seasonal business
Example scenario — illustrative only. A Nelson Tasman kayak hire and tour business has fixed costs — rent, two permanent staff, insurance, vehicle leases and the owner’s minimum drawings — of about $28,000 a month. Its quietest stretch runs from late May to late August, when revenue covers only part of those costs. The owner’s forecast shows a shortfall across those three months of around $55,000.
The owner decides to hold roughly one month of fixed costs as a cash buffer, built by transferring a larger share of receipts between December and March, and to arrange a standby line of credit to cover the rest of the winter gap if needed. The buffer handles the first few weeks of winter; the facility is there if the season starts late.
Common mistakes
- Counting the overdraft as a buffer. An overdraft can be reduced or withdrawn by the bank.
- Mixing buffer and tax money. When the tax bill arrives, the buffer disappears.
- Never rebuilding. A buffer that’s drawn on and not replenished is gone.
- Holding too much. Cash sitting idle while the business pays for expensive debt can be inefficient. Review the balance with your accountant.
If you need a backstop
If your buffer isn’t yet where it needs to be, a business line of credit can sit behind it — generally for businesses trading six months or more. For larger one-off needs, a property-secured loan of $20,000 to $1m may suit. Capital On Call’s 60-second enquiry is free and doesn’t affect your credit score.