Build a summer cash buffer: how much, and where to keep it

Picture the second week of January. The phone is quiet, half your customers are still at the beach, and the bank balance is lower than it has been all year. Then GST and provisional tax land on the 15th, and PAYE follows on the 20th.

For a lot of NZ business owners, that week is the most stressful of the year. Not because the business is in trouble, but because there was no cushion between the December slowdown and the January bills.

That cushion has a name: a cash buffer. Here is how to work out how big yours should be, how to build it between now and Christmas, and where to keep it so it is there when you need it.

Why summer needs its own buffer

We covered the shape of the summer dip in our summer slowdown cashflow guide. The short version: December to February is the most predictable cash squeeze in the NZ business year.

Income slows as customers close up and pay later. At the same time, some of your biggest costs bunch together. Holiday pay and public holidays make the December payroll larger than usual (we explain why in Holiday pay and the December payroll). Then January brings GST, provisional tax and PAYE within a few days of each other.

Because the dip is predictable, it is also plannable. A buffer is simply the plan, sitting in a bank account.

How much should your buffer be?

There is no single right number, but there is a simple way to find yours.

Step 1: Work out your fixed monthly outgoings. Add up the costs that do not stop when sales slow: wages, rent, loan repayments, insurance, subscriptions, vehicle costs. Your profit and loss report in Xero is a good starting point. Leave out costs that only happen when you are trading, like materials for jobs.

Step 2: Estimate the gap. Look at last December, January and February. How much lower was income than a normal month? If you have a cashflow forecast, this is where it earns its keep. If you do not, last year's bank statements will tell the story.

Step 3: Add the January bills. Write down what you expect to pay IRD in January: GST for the period ending 30 November (due 15 January), any provisional tax instalment due the same day, and PAYE on the 20th. These are not surprises, so treat them as known costs.

Step 4: Add a margin for the unexpected. A customer who pays in March instead of January. A van that needs new tyres. Ten to twenty percent on top is a sensible cushion.

Your buffer is the gap from Step 2, plus the January bills from Step 3, plus the margin from Step 4.

As a general guide, many small businesses aim to hold one to three months of fixed outgoings in reserve across the year. Your summer buffer may sit at the higher end of that range, then ease back once trading picks up in February.

How to build it between now and Christmas

If the number feels big, remember you have a few weeks. The trick is to build it steadily rather than hoping December is strong enough to cover it.

Sweep a set percentage. Every time a customer payment comes in, move a fixed percentage to your buffer account. If you already use a set-aside system for tax, this works the same way, just in a separate account.

Invoice before you switch off. The cash you bill in November and early December is what funds January. Our guide to invoicing before the break has a checklist for this.

Chase what is overdue now. An invoice that is 60 days overdue today will not get paid while your customer is on holiday. Make the calls while they are still at their desks.

Hold off on discretionary spending. New equipment or a big stock order can often wait until February, when you can see how the summer actually played out.

Where to keep it

Where your buffer lives matters almost as much as how big it is.

Keep it separate. A buffer sitting in your everyday account is not a buffer. It looks like spare cash, and spare cash gets spent. Open a separate account and give it a clear name, like "Summer buffer", so its job is obvious every time you log in.

Keep it accessible. This is money you expect to use within weeks, so it needs to be available when January bills fall due. An on-call savings account with your business bank is usually the simplest option. A term deposit can earn more, but check it matures before you need the cash, as breaking one early usually costs you.

Keep it in cash, not stock. Money tied up in stock, or in work that has not been invoiced yet, cannot pay a tax bill. The buffer needs to be actual money in the bank.

Using it, and refilling it

A buffer is there to be used. If January is tight, draw on it without guilt. That is exactly what it was built for.

The key is to refill it once trading picks up. Keep the same sweep going through February and March, and you will be most of the way to next year's buffer before winter, which brings its own cashflow squeeze.

The bottom line

The summer slowdown is not a surprise, so it does not need to feel like one. Work out your number, start setting it aside now, and keep it somewhere separate and easy to reach. January stays calm, and you get to actually enjoy the break.

If you would like a hand working out your buffer, or building a summer cashflow forecast around it, book a time with us. We would love to help.