Building a cash buffer for your business

Most businesses go through months when money comes in more slowly than it goes out. A customer pays late, a big bill lands at the same time as a quiet spell, or an opportunity comes up that needs cash quickly.

A cash buffer, money set aside for exactly these moments, gives you breathing space. It means a bad month is an inconvenience rather than a crisis. Here’s how to think about building one.

Why a buffer matters

Profit and cash are not the same thing. A business can be profitable on paper and still struggle to pay its bills if customers pay late or costs fall due at the wrong time. A buffer smooths out those gaps, so you’re not forced into expensive borrowing or rushed decisions.

It also gives you options. With some cash in reserve, you can take on a larger order, replace equipment when it breaks or ride out a slow season without cutting back on the things that matter.

How much should you aim for?

There’s no single right figure. A sensible starting point is to work out your fixed monthly costs, such as rent, salaries, loan repayments and subscriptions, and aim to hold enough to cover a few months of them. Then adjust for your own business:

• How predictable is your income? Businesses with seasonal trade or a few large customers usually need a bigger buffer than those with steady, regular income.
• How quickly do customers pay? Long payment terms tie up cash, so the buffer needs to cover the wait.
• What could go wrong? Think about the most likely shocks, such as losing a key customer or a major repair, and what they would cost.
• What other options do you have? An agreed overdraft or other facility can help, but it isn’t the same as cash you own.

Where to keep it

Keep the buffer in a separate business account, so it isn’t mixed with day-to-day spending and doesn’t get used by accident. It needs to be available at short notice, so avoid tying it up somewhere you can’t reach it quickly. Some businesses use a separate account with the same bank, so they can move money across in minutes when they need it.

Building it gradually

Few businesses can set aside months of costs in one go. The practical approach is to build it a little at a time:

• set aside a fixed share of each month’s receipts as soon as they arrive;
• add to it when you have a good month, rather than spending the extra;
• review your regular costs and move anything you no longer need to pay into the buffer;
• set a target and track progress, so you know when you’ve reached it.

Don’t confuse it with your tax money

Money for VAT, PAYE, Corporation Tax or Self Assessment isn’t part of your buffer. Those are bills you already know are coming. Keep a separate pot for them, and keep the buffer for the things you can’t predict.

Using it, and topping it up

A buffer is there to be used when you need it. If you dip into it, make a plan to top it back up. And review the target once a year, because as your business grows, your costs, and the buffer you need, will grow too.

Talk to us about your cashflow

We can help you work out a sensible buffer for your business, build a simple cashflow forecast and keep an eye on it through the year. Call us on 020 7164 0225, send us a WhatsApp message or email us at info@ibandco.co.uk.

You can also read about our management accounts and bookkeeping services.

First published 11 June 2024. Tax content checked on 9 October 2026. This article reflects the rules at the date it was first published. Where something has changed since, we’ve added an update note. Rules and rates change, so please check with us before acting.

Please note: this article is general information based on our understanding of UK tax rules at the date shown above. It is not advice for your circumstances, and tax rules and rates can change. Please speak to us before acting on it.