Back to the on-screen lesson ·
The part of one named late receipt a month cannot cover from its own surplus, and whether the cash already held is enough.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will name one timing risk — which receipt, how much, which month — run the month with and without it, size a buffer as the part of that shortfall the month cannot absorb by itself, and say whether the cash already held is enough.
You can find the invoices most likely to be late, the bills that fall before a receipt, and the stock that has to sell before a month can be paid. A buffer is the cash kept back so that one of those things going wrong does not stop the business paying its way. This lesson closes the unit by turning everything in it into one sum an owner can actually hold in the account, and one sentence that says what the sum is for.
| Term | What it means |
|---|---|
| Named risk | One stated thing that could go wrong: which receipt or cost, how much, in which month. |
| Surplus | A month's money in less its money out, as planned. |
| Buffer | Cash held at the start of a month against a named risk. |
| Shortfall | How far below zero the month would close if the risk happened. |
| Line of credit | Borrowing on the business account up to an agreed limit, arranged in advance. |
| Reserve account | A separate account holding the buffer, so it is not spent by accident. |
Every owner who has been short of cash wants a cushion. The trouble with a cushion is that nobody can say whether it is big enough, because nobody has said what it is for. A buffer is a cushion with a name on it.
Start from one stated risk — Delta Couriers paying its 1400-dollar invoice a month late, say — and run the month without that money. The month does not need the whole 1400 held back, because it has a surplus of its own: if 8200 comes in and 7600 goes out as planned, 600 of the shortfall is absorbed by the month itself.
$$\text{buffer} = \text{amount at risk} - \text{the month's own surplus}$$
Here that is 1400 − 600 = 800 dollars. Now compare it with the cash the business already holds. Hold 1100 and the risk is covered with 300 to spare; hold 500 and 300 dollars has to be found before the month starts — kept back, arranged in advance, or taken out of the risk by changing the terms.
Two rules keep the figure honest. One named risk at a time: a buffer against two things going wrong together is a different buffer, for a different, stated risk. Recheck it when something changes: a new large customer, new terms, a new season.
Another way: steps
Another way: table
Fixit Mobile's month, run twice from 500 dollars, in dollars.
| As planned | If Delta pays late | |
|---|---|---|
| Opening | 500 | 500 |
| Money in | 8200 | 6800 |
| Money out | 7600 | 7600 |
| Closing | 1100 | −300 |
The buffer the risk needs is 800; 500 is held; 300 is missing.
Name the risk in one sentence. Delta Couriers pays its March invoice of 1,400 in April instead. A sentence that names the customer, the amount and the month can be checked; customers might pay late cannot.
Work out the month's surplus as planned. Money in less money out, from the forecast. If the month plans a deficit, the surplus is below zero and the buffer is larger than the amount at risk, because the month cannot absorb anything.
Take the surplus off the amount at risk. The result is the buffer: the cash that must be in the account at the start of the month for it to close at zero if the risk happens.
Compare with the cash held. Cash held less the buffer is the closing balance if the risk happens. At or above zero, the risk is covered.
Decide before the month starts. If the cash held is short, the difference has to be found — kept back from spending, arranged as an line of credit, or removed by changing the risk itself, such as asking the customer to pay part in advance.
Check the result by running the month in two columns, as planned and with the risk. The with-risk column should close at exactly the cash held less the buffer; if it does not, the surplus has been worked from different figures than the forecast.
Not every risk needs a buffer. The ones worth naming are those that are likely enough to happen in a given month, large enough that the month's surplus cannot absorb them, and outside the owner's control once the month has started.
For most small businesses the list is short. A large customer paying late — the aging list says which. A card provider or marketplace holding takings — it happens to new or fast-growing accounts. A breakdown of the one machine or van the business cannot trade without. A quiet month where the takings fall by a known share, as they did last year.
Each is sized on its own. The buffer held is the largest of them, and the owner says so: held against Delta paying late, which also covers a van repair. If two risks are connected — a supplier failure that also stops sales — they are named together as one risk and sized together.
A buffer in the everyday account tends to be spent: it looks like money available for stock or a new tool. Many owners keep it in a separate reserve account at the same bank, moved back only when the named risk happens.
Few businesses can put a whole buffer aside at once. It is built a little at a time — a fixed share of each month's surplus moved to the reserve — until it reaches the size the named risk needs. Until then, an line of credit arranged in advance can stand in for the missing part. An line of credit agreed while the business is doing well is a routine request; one asked for in the week the money is needed is an emergency, and the answer may be no.
Once the buffer is full, the surplus above it is free for the business to use. Holding far more than any named risk needs keeps money idle that could be paying down a loan or buying stock that sells.
Most of this lesson's risks are money that might arrive late. The same arithmetic works for money that might have to go out unexpectedly: a breakdown, a supplier's price rise, a tax bill larger than set aside.
For a cost, the amount at risk is the extra spending if the risk happens. The month's surplus absorbs part of it exactly as before, and the buffer is the rest:
$$\text{buffer} = \text{extra cost at risk} - \text{the month's own surplus}$$
A café whose espresso machine would cost 1,500 to repair, in a month that plans a surplus of 600, needs a buffer of 900 against that risk. If the repair can be paid over two months, the amount at risk this month is 750, and the buffer 150.
Costs have one lever that late receipts do not: insurance or a service contract can turn a large, uncertain cost into a small, certain one. Where a service contract costs less a year than the buffer would sit idle for, it is often the cheaper way to cover the risk. Either way, the risk is named, sized and compared with the cash, and the owner can say in one sentence what the money in the reserve is for.
A small physiotherapy practice treats patients whose sessions are paid by an insurance company, which settles its invoices monthly. The practice expects 18,000 dollars in next month, 11,000 of it from the insurer, and 15,500 dollars out, mostly wages and rent. Last year the insurer changed its claims system and paid a month late twice.
The owner names the risk: the insurer pays next month's 11,000 in the month after. The month's surplus as planned is 18,000 − 15,500 = 2,500, so the buffer the risk needs is 11,000 − 2,500 = 8,500. The practice holds 4,000.
Rather than spend months building a reserve of 8,500, she looks at the risk itself. The insurer allows practices to submit claims weekly instead of monthly, which spreads its payments across the month; a late payment would then delay about a quarter of the 11,000, not all of it. She switches, and renames the risk: one week's claims, about 2,750, paid a month late. The buffer that needs is 2,750 − 2,500 = 250, and the 4,000 she holds covers it many times over.
She keeps the reserve at 4,000 anyway, and writes down why: it covers the new named risk, and a month in which self-paying patients fall by a third. Changing how the practice is paid did more than any amount of saving could have.
Banks are required by their regulators to hold capital and cash against stated scenarios — a set of loans going bad, depositors withdrawing money quickly — rather than against a general sense of caution. The scenarios are written down, the buffers are sized against them, and both are reviewed. A small business does the same thing at a smaller scale when it names one risk and holds the cash that risk needs.
A buffer is for a vague feeling. Then nobody can tell whether it is big enough. Name the risk and size the buffer against it.
The buffer must be the whole late payment. The month's own surplus absorbs part of it. Holding the whole amount back keeps cash idle for no stated reason.
A forecast makes a buffer unnecessary. A forecast is where the risk is found; it does not make the customer pay on time.
Add up every risk. That sizes a buffer for everything going wrong at once, which is one more risk, and should be named as such if it is meant.
A buffer, once set, is done. It is sized against this month's risks and must be rechecked when a customer, a term or a season changes.
A buffer is spare money. It is money with a job. Spending it on something else, however useful, leaves the named risk uncovered again.
Name the risk: The Orchard paying 1,100 for May's salad in July.
$1100 \text{ at risk in June}$
One receipt, one amount, one month.
Find June's surplus: 4,500 in, 4,000 out.
$4500 - 4000 = 500$
What the month absorbs by itself.
Size the buffer.
$1100 - 500 = 600$
The part the month cannot absorb.
Compare with the 350 Tomasz holds.
$350 - 600 = -250$
He is 250 short of covering the risk.
Decide before June starts.
$\text{arrange } 250 \text{ in May}$
He knows in May rather than finding out in June.
Find the month's surplus: 8,200 in, 7,600 out.
$8200 - 7600 = 600$
The same surplus for both risks.
Size the buffer for Delta paying 1,400 late.
$1400 - 600 = 800$
The first named risk.
Size the buffer for the van needing a 1,000 repair.
$1000 - 600 = 400$
The second, sized on its own.
Keep the larger.
$800$
It covers whichever one happens.
Size both together, to see what it would take.
$1400 + 1000 - 600 = 1800$
A different, larger risk; Dan decides it is too unlikely to hold against.
Compare 800 with the 500 held.
$500 - 800 = -300$
He moves 300 to the reserve from the next two months' surplus.
Name the risk: the Town Hall canteen's 1,200 paid a month late.
$1200$
The largest receipt that has been late before.
Find the month's surplus: 9,000 in, 8,400 out.
$9000 - 8400 = 600$
As planned.
Size the buffer.
$1200 - 600 = 600$
The cash that must be held.
Compare with the 200 in the reserve account.
$600 - 200 = 400$
Four hundred still to build.
Plan to move 100 a month from the surplus.
$400 \div 100 = 4$
Four months to fill it.
Arrange cover for the months in between.
$\text{a line of credit of } 400$
Agreed now, while the café is doing well.
Set the date to recheck.
$\text{when the canteen's contract renews}$
A new contract may change the amount or the terms.
Find the month's surplus.
$8000 - 7600 = 400$
Money in less money out, as planned.
Size the buffer.
$1000 - 400 = 600$
The amount at risk less the surplus.
Compare with the cash held.
Fixit Mobile opens next month with $1000$ dollars. It expects $6400$ dollars in, including $1800$ that is at risk from Westgate Clinic paying for the fleet repairs a month late, and $6100$ dollars out. Fill in the month as planned and the month if that risk happens, in dollars. Write a closing balance below zero with a minus sign.
| As planned, dollars | If the risk happens, dollars | |
|---|---|---|
| Opening cash | 1000 | 1000 |
| Money in | 6400 | |
| Money out | 6100 | 6100 |
| Closing balance |
Complete the worked solution: next month a shop expects $5300$ dollars in and $5000$ out. The named risk is its largest customer paying $1000$ dollars a month late. It holds $400$ dollars at the start. Size the buffer and say what is missing.
Find the month's surplus as planned.
$5300 - 5000 =$ s
What the month absorbs by itself.
Take the surplus off the amount at risk.
$1000 - (\text{surplus}) =$ b
The part the month cannot absorb: the buffer.
Close the month with the risk.
$400 + (\text{surplus}) - 1000 =$ l
Below zero: the cash held is not enough.
Find what is missing.
$(\text{buffer}) - 400 =$ d
The amount to find before the month starts.
Say when to act.
$\text{before the month begins}$
Arranged in advance, cover is cheap; found on the day, it is not.
Fixit Mobile's biggest client pays about $700$ dollars a month and has paid late twice this year. Put Dan's steps for setting a buffer in order.
Number the steps in order (write the number in the box):
Next month Fixit Mobile expects $7500$ dollars in and $6800$ dollars out. The named risk is Delta Couriers paying the fleet invoice a month late: $1500$ dollars of the money in. How many dollars of cash must be in the account at the start of the month so that it does not go below zero if that happens?
Answer:
Five sentences from Corner Bean's notes about keeping cash back. Mark the ones that describe a buffer that could actually be checked.
This task has no paper form; do it on a device.
A market stall takes about $800$ dollars a day by card. Its card provider warns that it may hold takings back for up to $9$ days while it reviews the account. As planned, the month ends $500$ dollars up. How many dollars of buffer does that named risk need?
Answer:
A wedding caterer expects its busiest month to end $300$ dollars up, as planned. It has named two risks for that month: a couple's final payment of $1400$ dollars arriving a month late, or the van needing a repair of $900$ dollars. Fill in the buffer each risk needs, the one to hold against whichever single risk needs more, and what a buffer against both together would be.
| Amount | |
|---|---|
| Buffer for the late payment, dollars | |
| Buffer for the repair | |
| Buffer against the larger single risk | |
| Buffer against both together |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Corner Bean opens next month with $900$ dollars. It expects $9600$ dollars in and $8900$ dollars out; the named risk is Harbor Office paying its invoice a month late, which would take $1000$ dollars out of the money in. If that happens, what does the month close at, in dollars? Write a figure below zero with a minus sign.
Answer:
You can size a buffer against a named risk and compare it with the cash held. Tell someone why a buffer with no named risk cannot be checked, and why it does not have to be the whole late payment. Next: the three financial statements, and the three questions they answer.
15. Your turn: 8000 in and 7600 out as planned; a 1000 receipt at risk; 700 held, step 3
$700 - 600 = 100$
Covered, with 100 to spare.