Building a Cash Buffer
Why three months of operating cash is the most important number you have not built yet.
Notes from Randall Harper. Thirty years working alongside owner-operators, executives and boards — companies of all types and sizes — across entertainment & media, hospitality, service based business, lifestyle businesses, financial services, retail and not-for-profit, in Australia, Asia, the United Kingdom and the United States. What follows is the thinking I keep returning to.
What a buffer actually buys you
A cash buffer is not really about cash. It is about the quality of decisions you make under pressure. Owners with no buffer say yes to bad work because they have to. They take loans on bad terms because they have to. They keep customers they should fire because they have to. A buffer does not change the business; it changes the owner. The same person, with three months of operating cash in the bank, becomes calmer, slower, and considerably more strategic.
How big, and where
A useful target is three months of fixed operating costs — rent, wages, insurance, software, your own wage — held in a separate high-interest savings account, ideally at a different bank from your operating account. Different bank matters because it adds enough friction to stop you sweeping it into operating cash on a bad Tuesday. The account exists to be untouched, not to be available.
Building it without strangling the business
- Start with one week's costs, not three months — make the first target trivially achievable.
- Sweep a fixed percentage of every customer payment — even 3% — into the buffer account automatically.
- Treat the buffer transfer like a non-negotiable bill, paid before any owner distribution.
- Top it up first in good months; resist the urge to spend the unexpected windfall.
- Review the target annually as your fixed costs change.
When you are allowed to use it
Define this in advance, in writing, because in the moment you will rationalise almost anything. A genuine buffer event is a real, temporary shock — a major customer delay, a piece of essential equipment failing, a quiet quarter that needs bridging. A buffer is not for tax bills that should have been planned for, not for opportunistic equipment purchases, and not for covering an underpriced quote. Use it for what it was built for and the buffer becomes a permanent capability, not a one-time rescue.
What changes when you have one
The first time you make a decision purely because the buffer was there — turning down a customer, holding a price, waiting for the right hire — you will understand why the discipline of building it mattered. The buffer is not the goal; it is what the goal makes possible.
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The contents of this paper are the opinion of Clear Point Advisory only. Readers should rely on their own judgement and obtain professional advice appropriate to their circumstances.