It is easy to assume that more cash always means a stronger business. To a point, that is true. Cash provides security, helps absorb weaker months, and gives management more flexibility.
But holding too much cash without a clear purpose can also be inefficient.
Cash sitting in the bank is cash that is not being used for hiring, marketing, product development, equipment, or other growth opportunities. So the real question is not “How much cash can we keep?” but “How much cash do we actually need?”
That is the purpose of a cash buffer: enough cash to protect the business when reality does not match the plan.
There is no single number that works for every company. A business with recurring revenue and reliable customer payments may need a much smaller buffer than one that depends on a few large deals.
How Do You Set the Right Cash Buffer?
A CFO will typically look at several factors:
- Monthly cash outflow: How much does the business need to pay each month, even if sales slow down?
- Revenue stability: Recurring revenue makes cash flow easier to predict than project-based or deal-based revenue.
- Customer payment terms: Revenue is not the same as cash in the bank. Net 60 or Net 90 terms can create a significant funding gap.
- Business risk: Companies operating in volatile markets or relying heavily on one customer may need a larger buffer.
- Access to funding: A company with an available credit line is in a different position from one that would need to raise capital if cash runs low.
From there, management can build scenarios. What happens if revenue is below forecast for three months? What if a major customer pays late? What if an investment has to be made earlier than expected?
How Danoy’s External CFO Helps
Danoy’s external CFO helps management determine the cash buffer that fits the company’s actual needs.
The process combines cash flow forecasts, spending levels, payment cycles, financial commitments, and growth plans.
The goal is not to keep as much cash as possible, and not to spend every available dollar. It is to find the right balance between financial security and the ability to invest in growth.
Want to understand how much cash your company should keep on hand? Get in touch with Danoy.