The term is a cash-management description, not a universal regulatory ratio. State whether a quoted buffer means all readily available cash or only the cash left after reserving known payments. Here, it means the available cash stock tested against a dated payment schedule.
A payment schedule tests the buffer
Consider a fictional treasury with USD 20,000 of unrestricted cash. Before any receipts arrive, it must make an essential payment of USD 15,000 and a stipulated margin call of USD 10,000. There is no borrowing facility or other funding in this example.
| Cash item | USD |
|---|---|
| Available cash before either payment | 20,000 |
| Essential payment | −15,000 |
| Cash remaining after that payment | 5,000 |
| Margin payment still due | −10,000 |
| Unfunded amount | 5,000 |
Total need is USD 25,000, so the additional funding required is USD 5,000. A projected balance of minus USD 5,000 identifies the gap; it does not mean the account can actually overdraw. The treasury cannot meet both obligations from the stated cash alone.
Look at the worst deadline, not just the ending balance
For one specified scenario, let and be cash outflows and usable inflows at ordered payment dates, all in the same currency. If receipts counted at a date are usable before its payments, the minimum opening cash needed is
Starting with cash , the scenario's additional funding gap is . In the example there are no inflows, so the largest cumulative need is USD 25,000. Real payment cutoffs may require finer time buckets: an afternoon receipt cannot fund a morning payment merely because both appear on the same day's ledger.
Count resources that can actually be used
Basel's bank liquidity guidance emphasises cash-flow timing and an unencumbered liquid-asset cushion. Those principles explain why a buffer needs an operational test alongside a balance-sheet total. They do not establish a single cash percentage suitable for every trader or business.
Sources
- Basel Committee: Liquidity risk management and supervision, Principles 5, 8 and 12: cash-flow measurement, intraday payments and liquid-asset cushions. Bank-focused guidance.
- Financial Stability Board: Liquidity Preparedness for Margin and Collateral Calls, final report, 10 December 2024, recommendations 2, 4–5 and 7. Non-bank market participants.
- Hull, John C. Risk Management and Financial Institutions, fourth edition, Wiley, 2015, Chapter 24, §24.2, p. 507: funding liquidity and the distinction from solvency.