Cash Cushion

What is a cash cushion?

A cash cushion is the reserve of liquid funds a business maintains to absorb unexpected expenses or revenue shortfalls. Also called an emergency fund or operating reserve, the cushion provides a buffer against cash flow volatility. Professional service firms with variable client payments and fixed costs like payroll benefit significantly from maintaining adequate cash reserves.

How much cash cushion to hold

Common targets range from one to six months of operating expenses. Factors include revenue predictability, client concentration, fixed cost structure, and access to credit. A firm with diversified clients and a credit line might hold two months. A firm dependent on one major client with no credit access might need six months. There is no universal right answer. Assess your specific risk profile.

Building and protecting the cushion

Accumulate reserves gradually from profitable periods. Segregate reserves in a separate account to avoid accidental spending. Define what constitutes an emergency warranting cushion use. Replenish after any drawdown. The cushion exists to handle genuine crises, not to fund expansion or smooth normal seasonality. Protect it accordingly and rebuild promptly after use.