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How many cash buffer days does your business need?

Learn how to ensure you have enough reserves for any downturns or opportunities. Presented by Chase for Business.

minute read


    What if your business had to close for a week? How about a month? Would you have enough cash to survive? These are the nagging questions on the minds of many business owners — especially over the past couple of years. And it’s why having positive cash flow is so important to small businesses today.

    Having cash on hand may be an important factor in your ability to weather any unexpected storm that causes your business to slow down or shut down. The amount of time your business is able to continue to pay operating or business expenses or debts using reserved cash without any additional money coming in is known as your cash buffer days. The more cash buffer days you have, the better.


    How do you calculate cash buffer days?

    Although it varies by business, there is a standard formula to calculate the number of cash buffer days your business needs.

    To calculate your cash buffer days, you need to understand three things: cash inflow, cash outflow and cash balance. Then compute the ratio of your average daily cash balance to your average daily cash outflow.

    • Cash inflow — Money coming into your business (deposits into checking or savings accounts, revenue/sales, returns on investments, owner transfers, private savings, loan disbursements or tax rebates)
    • Cash outflow — Money going out of your business (debits from any business deposit or savings accounts for supplies purchased, payroll, owner transfers from the account to private savings, loan repayments or tax payments)
    • Cash balance — Cash held at the end of the day across all business deposit or savings accounts

    Cash balances divided by cash outflows = cash buffer days

    So what’s the sweet spot?

    There’s no one-size-fits-all when it comes to cash buffer days. It depends on many factors, including your industry, revenue type, the size and structure of your workforce, overhead costs, inventory type and the costs to use and maintain your space. As a general rule of thumb, brick-and-mortar shops that rely on customers coming through their doors are more prone to unforeseen circumstances — weather, labor shortages, a global pandemic — that could put a damper on their business or cause it to halt altogether.

    For instance, let’s say you have a home-based painting business. You’re the general contractor, and you hire subcontractors as needed. That means your inventory is a truck, a couple of ladders, some brushes and other painting supplies. If you had to close shop for a month or more, you might not have any cash coming in, but you also wouldn’t have any high overhead to pay out. The reason is that you don’t have any permanent employees on the payroll, a lease payment for a storefront or perishable inventory. Your business may be able to get by for a longer period of time (more cash buffer days) because you’re not paying out as much or tapping into your reserves.

    On the other hand, let’s imagine you own a fine dining establishment with a total of 15 salaried employees — chefs, servers, bartenders and hosts. You have a refrigerator full of steaks, seafood and vegetables. A wine cellar that has to be kept at a precise temperature. Your costs to maintain staff, perishable inventory and real estate will still be high even though you’re not bringing in any cash. That means your cash reserves won’t last as long. A two-month cash buffer for the painting business may be only a two-week cash buffer for you.


    How does your business stack up?

    According to a recent survey, half of all small businesses only have enough cash reserves to last 27 days. The other half is equally divided between businesses that hold fewer than 13 cash buffer days in reserve and those that hold over 62 cash buffer days in reserve. Here’s a breakdown by industry of how long, on average, businesses can survive without bringing in any revenues.

    Cash buffer days by industry

    • Restaurants: 16 days
    • Repair and maintenance: 18 days
    • Retail: 19 days
    • Construction: 20 days
    • Personal services: 21 days
    • Wholesalers: 23 days
    • Metal and machinery: 28 days
    • Health care services: 30 days
    • High-tech manufacturing: 32 days
    • Other professional services: 33 days
    • High-tech services: 33 days
    • Real estate: 47 days

    Remember, it’s not only important to monitor how much cash you have but also to understand how different scenarios will affect your cash reserves when developing your cash flow strategy.


    What's the bottom line?

    If there’s one thing we’ve learned from the pandemic, it’s that things can change overnight. Having enough cash reserves to cover your normal operating expenses should revenues stop coming in isn’t only nice to have — it’s essential. For other ways to help bridge the gap during tumultuous times and maintain your business cash flow, speak with a Chase business banker.


    For informational/educational purposes only: The opinions expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. Opinions and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for any individual. Information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. You should carefully consider your needs and objectives before making any decisions and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.

    JPMorgan Chase Bank, N.A. Member FDIC. ©2023 JPMorgan Chase & Co.

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