Plain definition
A cash buffer is the minimum amount of usable cash a company chooses to protect against delayed collections, unexpected payments, or temporary disruption.
Target cash buffer = critical monthly cash outflows × chosen coverage period
Use cash that is genuinely available. Restricted or unavailable balances do not provide the same protection.
Worked example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company has critical monthly cash outflows of .
Management chooses a coverage period of 1.5 months.
| Critical monthly cash outflows | |
|---|---|
| Coverage period | |
| Required buffer |
| Usable cash | |
|---|---|
| Required buffer | |
| Cash above the buffer |
The is not automatically available for discretionary spending.
Why it matters
There is no universal number of months.
The right buffer depends on the company’s actual exposure to delayed collections, unexpected obligations, and operating disruption.
Two companies with the same monthly outflows may need different buffers.
Risk exposure—not monthly outflows alone—determines the buffer.
Practical consequence
Set the buffer from the company’s risk drivers.
Consider critical obligations, collection volatility, customer concentration, seasonality, and the time needed to reduce spending.
Count only committed funding that is available to draw when needed.
Require additional approval for any decision expected to reduce cash below the buffer. Review the policy when risks or the operating model change.
Try your own numbers
Estimate how long unrestricted cash stays above the reserve at the current operating burn.
Cash runway