Treasury Cash Liquidity Planner
Determine optimal minimum cash buffers for operational and volatility risks. Enter values for instant results with step-by-step formulas.
Formula
Target Liquidity = Operational Buffer (2mo OpEx) + Volatility Buffer (% of WC) + Strategic Shock
The Minimum Liquidity Target is constructed from three layers: 1) Operational Buffer: Typically 2 months of operating expenses to cover routine outflows like payroll and rent. 2) Volatility Buffer: A percentage of working capital needs to cover revenue timing mismatches (e.g., late payments). 3) Strategic Buffer: A fixed amount set aside for specific risks or one-time shocks. Summing these provides a defensible, risk-adjusted cash target.
Worked Examples
Example 1: Small Agency Planning
Problem:$50k Monthly OpEx, 30-day cash cycle, wants 20% volatility buffer + $10k shock reserve.
Solution:Op Buffer: $100k. Volatility: ($50k/30 * 30 * 0.20) = $10k. Shock: $10k. Total: $120k.
Result:$120,000 Target (72 days cash on hand)
Frequently Asked Questions
What is a liquidity buffer?
A liquidity buffer is excess cash kept on hand to cover unexpected expenses, revenue shortfalls, or delays in receivables. It ensures the business can continue operations during financial stress without needing emergency borrowing.
How much cash should a small business keep?
A common rule of thumb is 3 to 6 months of operating expenses (OpEx). However, this varies by industry. Volatile industries (like tech startups) often need 12+ months (runway), while stable service businesses might manage with 2-3 months.
What is the Cash Conversion Cycle (CCC)?
CCC measures how long it takes to convert investments in inventory and resources into cash flows from sales. It calculates: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding. A lower CCC means better liquidity.
How does high inflation affect liquidity planning?
Inflation increases OpEx over time, meaning your static cash buffer represents fewer days of runway. In high inflation, you must periodically increase your nominal cash buffer to maintain the same 'real' coverage.