Determining how much cash flow a business genuinely needs isn’t about maximising reserves indefinitely, it’s about having genuine, reliable coverage for real, upcoming obligations, and understanding this distinction matters for setting a sensible cash flow target rather than an arbitrary one.
These are the factors that genuinely determine how much cash flow a business needs.
Start from genuine, known upcoming obligations
Rent, payroll, supplier payments and loan repayments due in the near term represent genuine, known obligations that a business’s cash flow needs to reliably cover before anything else.
Mapping these obligations out specifically, rather than working from a vague sense of monthly expenses, produces a genuinely accurate picture.
Account for genuine, realistic income timing
Cash flow needs depend not just on total expected income but on genuinely realistic timing of when that income actually arrives, since a mismatch between when money is owed and when it’s received creates real risk even for a profitable business.
Our guide to what aged creditors and debtors reports genuinely reveal covers understanding this timing mismatch properly.
Build in a genuine buffer for unexpected costs
Beyond known obligations, a genuine buffer for unexpected costs, equipment failure, a slow month, an unforeseen expense, protects against a disruption that would otherwise force reactive, costly borrowing.
This buffer should be realistic based on the business’s actual volatility, not either negligible or excessive relative to genuine risk.
Review and adjust this genuine target as the business changes
A cash flow target set once and never revisited becomes outdated as a business’s obligations, income patterns and risk profile change over time.
Our guide to the key factors to consider in financial planning covers this, and an accountant registered with the Independent Regulatory Board for Auditors can help build this discipline properly.
Frequently asked questions
Should a business aim to maximise cash reserves indefinitely?
No, the goal is genuine, reliable coverage for real, upcoming obligations, not maximising reserves without limit.
What should cash flow needs be calculated from?
Genuine, known upcoming obligations like rent, payroll and supplier payments due in the near term.
Does income timing affect cash flow needs?
Yes, a mismatch between when money is owed and when it’s actually received creates real risk even for a profitable business.
Should a buffer be included beyond known obligations?
Yes, a genuine buffer for unexpected costs protects against disruption that would otherwise force reactive borrowing.
Should a cash flow target be set once and left unchanged?
No, it should be reviewed periodically as the business’s obligations and risk profile change over time.
