Most owners carry a number in their head below which they start to feel uneasy. A cash floor is that number, written down and worked out properly, so the forecast can warn you before you reach it rather than after.
It is not the same as zero. Zero is when you cannot pay someone. The floor is the point where you still have time and options.
What a floor has to cover
A good floor answers one question: if no money came in for a while, how long could the business keep its promises? That means three things.
- Fixed costs for a set number of weeks. Payroll, rent, insurance, loan repayments and the software you cannot switch off.
- Money that is not yours. Sales tax collected, payroll taxes withheld, customer deposits for work not yet done.
- One bad surprise. A late client, a broken machine, a supplier asking for payment up front.
A worked example
Take a 14-person studio. Payroll is $38,200 every two weeks, rent is $6,450 a month and other fixed costs come to about $12,000 a month. That is roughly $101,000 of fixed costs a month, or about $23,500 a week.
| Part of the floor | How it is worked out | Amount |
|---|---|---|
| Fixed costs | 4 weeks × $23,500 | $94,000 |
| Tax held for others | Sales tax collected, not yet paid | $31,000 |
| One surprise | Largest client invoice, paid 45 days late | $25,000 |
| Cash floor | $150,000 |
Four weeks is a reasonable starting point for a business with steady income. If your income is lumpy or seasonal, use six to eight weeks. If you sell to large clients on long terms, size the surprise around your biggest one.
Zero is when you cannot pay someone. The floor is the point where you still have time and options.
Using the floor
Once the floor exists, the forecast has a line to measure against. Any week that dips below it is a week you know about in advance, which means you can move a payment, chase an invoice or arrange finance while it is still cheap and calm to do so.
It also works the other way. Cash comfortably above the floor for the whole forecast is cash you can use: for stock bought at a better price, for a hire, or for paying down a loan early.
See your own thirteen weeks, built from your real bank balances.