Median Cash Buffer Days by Industry

4 min read

Executive Summary

Did you know that most small businesses in America have less than a month of cash reserves? The effects of the pandemic and its associated measures have brought the importance of cash reserves of small businesses to the fore. In this post, we will discuss the importance of cash reserves as a key measure of a small business’s vitality and security.

Disclaimer: Our first priority is giving you the best financial advice for your business. Tillful may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations in the content on our website. Editorial note

How long can your business stay open if you are unable to bring in any money? For most small businesses in America, the answer is slightly less than a month

This question is the biggest dilemma that small business owners have to face this year. The effects of the pandemic and its associated measures have brought the importance of cash reserves of small businesses to the fore. Cash reserves are a key measure of a small business’ vitality and security. In good times, they are a readily available means to pay employees and suppliers. In bad times, they are a critical lifeline to draw on. Regardless of the economic outlook, it is undeniable that cash reserves are paramount for a small business. 

Yet, findings from JPMorgan Chase Institute’s inaugural report on the small business sector have found that the cash reserves of most small businesses are insufficient to tide them through a significant economic downturn or crisis situation. The median small business in America holds only 27 cash buffer days in reserve.

What are Cash Buffer Days?

JPMorgan Chase Institute defines cash buffer days as the number of days of cash outflows a business could pay out of its cash balance were its inflows to stop. They estimate cash buffer days for a business is calculated by the following formula: 

Average Cash Balance / Average Cash Outflow = Cash Buffer Days

Cash Buffer Days of Small Businesses 

The report explored the financial lives of small businesses by analyzing data constructed from over 470 million transactions conducted by 597,000 small businesses from February to October 2015. Cash balances vary widely across and within industries. The following table showcases the average cash buffer days according to industry.

Type of Industry Cash Buffer Days
Restaurants 16
Repair and Maintenance 18
Retail 19
Construction 20
Personal Services 21
Wholesalers 23
Metal and Machinery 28
Healthcare Services 30
High-tech Manufacturing 32
Other Professional Services 32
High-tech Services 33
Real Estate 47

Overall, it was found that half of all small businesses hold a cash buffer of less than one month. The bottom quartile of small businesses holds fewer than 13 cash buffer days in reserve while the top quartile holds over 62 cash days in reserve. 

Small businesses must rely on their cash buffer days to survive during liquidity crunches and these findings show that the typical small business has a limited margin for error. These findings are worrisome. Small businesses are expected to wait approximately 60 to 90 days to close their loans after submitting their application and this timeframe far exceeds the cash buffer days of the top 25% of small businesses. 

This could explain the lack of longevity in small businesses. The report also estimates a third of new businesses exiting within their first two years and a half exit within their first five years. Small businesses may be the anchor of the US economy but they are prone to low survival rates, likely due to insufficient cash reserves to cushion any financial shock. Given that the median inflows and outflows of small businesses are estimated at $380 per day and have a median daily balance of $12,100, JPMorgan Chase Institute states that this is lower than conventionally believed and have pointed out that the typical small business can only provide few full-time incomes after covering other expenses. The implication of this is that small changes in inflows and outflows can cause an unexpected financial shock to your business, thereby reiterating the critical importance of having strong and continuous cash flow. 

Planning Ahead

Over the past decade, we have seen crisis situations that not only created economic hardships for citizens but have devastated small businesses at large scale. We have seen from history that businesses, regardless of their size, need to ensure that they have a consistent cash buffer to improve their chances of survival. Just as how you might build an emergency fund worth 3 to 6 months of expenses as part of your personal finance strategy, you must employ the same financial prudence to your business finance. The general rule for small businesses is to maintain at least 3 to 6 months’ worth of operating expenses on hand. This is especially important for small businesses as they tend to have limited access to capital and fewer financial resources. Planning for the worst, even if the worst does not happen, may help business owners survive the tough times and get through crisis situations intact. 

About the author

Ken So

Written by Ken So

Ken is the Founder and CEO of Flowcast and Tillful. Having spent most of his career before Tillful in tech and investment banking, he covers all things business credit and finance with a twist of insider knowledge.

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