What is a Minimum Cash Balance?

A minimum cash balance is a cash reserve kept on hand to offset any unplanned cash outflows. Without this safety buffer, a business might find itself unable to pay its bills. The use of a minimum cash balance means that a certain amount of cash is maintained in a bank account, rather than being invested elsewhere, used to pay down debt, or returned to investors as a dividend.

A minimum cash balance is most necessary in environments where there are large differences between the timing and amount of cash inflows and cash outflows.

How to Calculate Your Minimum Cash Balance

The best way to derive your minimum cash balance is to create a detailed monthly budget, which includes all expected expenditures for fixed assets, as well as cash inflows from the expected sale of assets. This budget will reveal any projected cash shortfalls over the budget period. The minimum cash balance should offset the largest of these shortfalls.

If you are uncertain about the accuracy of your budget, then make a habit of revising it on a monthly or quarterly basis, so that projected cash balance information is as reliable as possible.