How to build a cash buffer for your company

2 min read

Step 1Set a target reserve

Step 2Fund it from profit

Step 3Pair with a facility

Step 1 — set a target

Decide how big a buffer you need. A common starting point is three to six months of fixed operating costs, adjusted for how steady your income is — steadier businesses can hold less, volatile ones more. Base it on your cost base, not a generic figure. See how much cash to hold.

Step 2 — fund it from profit, gradually

Build the reserve by sweeping a fixed slice of profit aside each month or quarter into a separate account, before it can be spent or over-drawn. Treat it like a bill to yourself. Small, regular transfers get you there without a painful lump — and the discipline of paying the buffer first is what makes it happen.

Step 3 — protect it

A buffer only works if it's genuinely reserved. Keep it in a separate account, and resist dipping into it for anything but a real emergency or opportunity. If you raid it for routine spending, it stops being a buffer. Directors who ring-fence the reserve keep it; those who leave it in the current account spend it without noticing.

Step 4 — pair it with a standby facility

You don't have to hold every rainy-day pound as idle cash. An arranged facility you can draw on acts as a second layer, letting you keep a leaner buffer while still being covered. Credicorp lends to the company with no personal guarantee, giving you standby working capital on tap. Size the combination with the working capital calculator.

Step 5 — review it against your forecast

Check the buffer against your cash flow forecast periodically — growth, new commitments and seasonality all change the target. A buffer sized for last year may be too small this year. See how to forecast cash flow.

Frequently asked questions

How do I build a cash reserve for my business?

Set a target — often three to six months of fixed costs, adjusted for how steady your income is — then fund it by sweeping a fixed slice of profit into a separate account each month before it can be spent. Protect it, and review the target as the business grows.

Do I need a big cash reserve if I have a loan facility?

Not necessarily. An arranged facility you can draw on acts as a backstop, letting you hold a leaner cash buffer while still being covered for a shock. Pairing a modest reserve with standby funding is often more efficient than holding a large amount of idle cash.