Set a minimum cash policy around obligations and response time

A minimum cash policy defines the funds the company wants available, how it measures them, and what happens when the forecast approaches the threshold. Start with payment obligations and the time management needs to respond to an adverse change. A round number called the reserve is difficult to apply when the team has not agreed which balances count or who can authorize an exception.

The Association of Corporate Treasurers frames board liquidity questions around committed resources, reliable forecasts, and financial stress. Its treasury briefing also distinguishes liquidity from the day-to-day management of cash. Use those questions to design a policy for the company's actual payment cycle and funding arrangements. There is no universal cash-floor percentage that fits every business.

List the accounts, entities, and currencies included in the measure. Identify restricted funds, client money, held processor balances, deposits, and amounts committed to specific obligations. Record how quickly an investment can become spendable cash and what conditions apply. The policy should make it difficult to substitute a large accounting balance for money available to pay the relevant entity's bills.

Keep committed borrowing capacity separate from bank cash, even if both contribute to a wider liquidity measure. Check current availability, draw conditions, reporting requirements, and settlement timing. A proposed loan, unapproved limit increase, or expected shareholder contribution should appear as a scenario until the company has evidence that it can access the funds on the required date.

Build a calendar of payroll, taxes, rent, debt service, critical suppliers, and other material commitments. Identify which dates are fixed and which actions require outside agreement. Then examine how long management needs to confirm a problem, approve a response, and obtain the resulting cash benefit. A policy designed around a month-end balance can miss a payroll shortfall halfway through the month.

Suppose a hypothetical company has a $120,000 payroll due in ten days and a large customer receipt expected in eight days. The narrow two-day cushion between an uncertain receipt and a fixed payment needs attention before the month-end review. A sensible trigger might require earlier review of that receipt and a confirmed funding alternative. The actual threshold should follow the company's evidence and approved risk tolerance.

Distinguish the operating floor from an earlier warning level. The warning should allow time to act before the company reaches the minimum. Define the forecast horizon and the measure used: for example, projected available cash in each week, with a separate check for known large payment days. Avoid describing a forecast warning as an actual breach of a bank covenant unless the contractual test also says so.

Run the policy through a delayed collection, a processor hold, a supplier prepayment request, and a period of weaker sales where relevant. Check that the same cash is not counted twice as reserve, planned capital spending, and funding for routine obligations. If the policy assumes borrowing, test whether the adverse event could also reduce that facility's availability.

Review the effect on operations as well as the cash total. An indiscriminate payment freeze can damage a critical supplier relationship or create other obligations. Specify which decisions require legal, payroll, tax, or operating review. The policy should direct attention and authority, with supported decisions about individual commitments rather than an automatic instruction to postpone everything.

Reassess the policy after a financing change, new entity, acquisition, major customer shift, seasonal change, or material expansion in fixed commitments. Use forecast errors to assess whether the warning gives enough notice. A repeated surprise in the same payment category may call for better source data as well as a different buffer.

Keep the current policy, approval date, calculation, exceptions, and unresolved warnings with the treasury records. If an accounting team maintains the forecast, distinguish its preparation duty from management's spending and funding authority. The policy is useful when the next person reviewing cash can identify the available amount, the coming pressure, and the decision that must be made.