A cash flow buffer is money that a company keeps precisely so that an unexpected situation does not turn into a crisis. It is not an investment or idle cash in the account, but insurance that gives the owner time to think instead of reacting in panic.<\/p>
In our survey, 30% of business owners said they would not immediately know where to find money if an unexpected cost or drop in sales occurred<\/strong>. Only 28% could say for sure how many months the company could keep going without new sales (read the survey summary<\/a>).<\/p> A common rule of thumb is to keep a buffer of at least 2\u20133 months of fixed costs<\/strong>: salaries including taxes, rent, leases, software and other costs that come even when there are no sales. The exact amount depends on the company:<\/p> Reverse Resources has been built largely by bootstrapping and with project funding rather than large investment capital. In a company like this, cash flow has to be especially visible, because every project and payment affects what the company can do next. Working with KL Raamatupidamine, the accounting of three countries and three business lines was brought together into one set of management information.<\/p> Now I feel so much more supported, because I no longer make these financial decisions alone.<\/p>Ann Runnel, founder and CEO of Reverse Resources (read the full story<\/a>)<\/cite><\/blockquote> A buffer is not only money, but also knowing that the numbers are correct and someone is keeping an eye on them.<\/p> I know that my company\u2019s accounting is in good hands.<\/p>Vallo J\u00f5esaar, Talloelekter O\u00dc<\/cite><\/blockquote> Part-time CFO<\/a> prepares a cash flow forecast, calculates the right buffer size for your company and tracks every month how it is filling up. Financial controlling<\/a> shows the cash reserve in months in the monthly management report. We also covered this topic in our webinar \u201cManaging cash flow in a company\u2019s growth phase\u201d, and you can ask for the recording on the webinars page<\/a>.<\/p> Let\u2019s say the company\u2019s monthly fixed costs are as follows:<\/p> A two-month buffer would then be about 21,400 euros and a three-month buffer about 32,100 euros. If the company has one big client who makes up half of revenue, or if sales are seasonal, it makes sense to keep a buffer closer to three months. (The example is illustrative.)<\/em><\/p> An overdraft is a good backup, but it is borrowed money that you pay interest on and that the bank can reduce by changing its terms. It is best to keep your own buffer with an overdraft alongside it.<\/p><\/details> In Estonia, profit retained in the company is not taxed, so keeping the buffer in the company makes sense from a tax perspective. If the money is taken out as a dividend, income tax is due on it.<\/p><\/details> The first step is a cash flow forecast for the next 4\u20138 weeks. Then you can decide which payments to postpone, whom to reach agreements with and whether temporary financing is needed. The earlier this is done, the more options you have.<\/p><\/details> A cash flow buffer doesn\u2019t make a company more profitable, but it prevents a good company from getting into trouble because of one late payment or a bad month. When you know how many months your company can hold out, you can make decisions calmly.<\/p> Free and with no obligation<\/p> Let\u2019s calculate together how big a cash flow buffer your company should have and how far you are from it right now.<\/p> Book a time and send your latest monthly income statement and balance sheet to kaideliis@klraamatupidamine.ee before the call. If you don\u2019t have reports, we\u2019ll start with what you have.<\/p>Why you need a buffer<\/h2>
How big should the buffer be<\/h2>
How to build the buffer<\/h2>
Two stories from our clients<\/h2>
Reverse Resources: growth without big investor money<\/h3>
Talloelekter: the confidence that the accounting is in order<\/h3>
How we can help<\/h2>
Example: calculating the buffer<\/h2>
Cost<\/th> Per month<\/th><\/tr><\/thead> Salaries including taxes<\/td> 8 000 \u20ac<\/td><\/tr> Rent and utilities<\/td> 1 200 \u20ac<\/td><\/tr> Leases and loan payments<\/td> 900 \u20ac<\/td><\/tr> Software, telecoms, insurance and other<\/td> 600 \u20ac<\/td><\/tr> Total fixed costs<\/strong><\/td> 10 700 \u20ac<\/strong><\/td><\/tr><\/tbody><\/table><\/figure> Where to keep the buffer<\/h2>
Frequently asked questions<\/h2>
Can an overdraft replace a buffer?<\/summary>
Should the buffer be kept in the company or in the owner\u2019s account?<\/summary>
What if there is no buffer and money is running short?<\/summary>
Summary<\/h2>
A 30-minute review of your numbers<\/h3>