How Much Cash Buffer Should a Small Business Keep?

A cash buffer is the difference between a slow month being inconvenient and being fatal.

The problem

Without reserves, any late invoice, tax bill, or quiet month forces emergency borrowing — usually at the worst possible time and the worst possible price.

A small business example

A small services business has $6,000/month in fixed costs (rent, salaries, software).

A 3-month buffer = $18,000. A 6-month buffer = $36,000.

What the numbers mean

Most small businesses aim for 3–6 months of fixed costs in cash. More if revenue is seasonal or concentrated in a few customers.

Practical interpretation

The right buffer depends on how lumpy your income is. Stable monthly retainers need less than project-based or seasonal income.

Action points

Calculate your total monthly fixed costs.
Set a buffer target between 3 and 6 months of fixed costs.
Keep the buffer in a separate account, not the operating account.
Top it up first, before owner distributions, after strong months.

Need to calculate this? Visit SME Finance Helper.