How do you calculate liquidity headroom?

Add cash at bank to what remains undrawn on committed facilities, then take out cash the business cannot use, such as balances held as security or trapped in a subsidiary, and any undrawn amount a condition would block. That gives headroom today. To find headroom on the day that matters, run the figure through a cash flow forecast and read it at the lowest point, often a week when tax, payroll and supplier payments coincide rather than a month-end.

Does an overdraft count as liquidity headroom?

It depends on how secure the line is. An overdraft repayable on demand, like any uncommitted facility, can be reduced or withdrawn at the bank's discretion, so a lender may count it at less than its limit or not at all. A committed facility counts for more, though a new drawing usually still depends on no default continuing. Practice differs on whether uncommitted lines are included, so a headroom figure should say which lines it counts.

How much liquidity headroom does a business need?

No single figure suits every business. What matters is the business's own cash cycle: the size of its largest weekly outflows, how far receipts can slip, and how long it would take to raise more money if they did. A lender reads the forecast's low point against those things, and against how far trading could fall before that low point turns negative. Where a facility sets a minimum, the figure is a term the parties negotiated, not a standard.

Why is month-end cash a poor measure of liquidity?

Because many businesses collect much of their income near the end of the month and pay many of their bills during it, so the balance sheet catches cash close to its monthly peak. A business can report a comfortable balance at every month-end and still come within days of its limit mid-month, when payroll, tax and the supplier run fall due. A lender who needs to know how close it runs asks for a weekly forecast.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Liquidity Headroom: a Worked Example

Count it on the worst day, not the reporting date.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

Liquidity headroom tells a lender how close a business runs to being unable to pay, and so how many weeks it has to fix a problem. It is not the cash on the balance sheet. It is what the business could still pay out on the worst day of its forecast: money it can actually spend, plus lines that will still lend on that day. Each part has to survive a reading of the documents, because pledged or trapped cash and a cancellable line can fall away. A month-end figure usually flatters it; the forecast's lowest week does not.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

// 01 — WHY A LENDER COUNTS IT ON THE WORST DAY

A business does not run out of money at a reporting date. It runs out on the day payroll, a tax instalment and a supplier run fall due together and the receipts have not yet arrived. Many customers pay at the end of the month, so a month-end balance sheet catches cash near the top of its range. A lender who reads headroom from the balance sheet is reading the business on one of its better days.

So the lender reads headroom off a forecast, usually a 13-week cash flow when the business is under pressure, and looks for the lowest point in it. The question is not whether there is cash on average, but whether something is left in the week the outflows bunch. That answer decides how much room the business has to absorb a late customer, a cost increase or a quarter below budget.

// 02 — HOW THE FIGURE IS BUILT

Cash at bank A

+ Undrawn committed facilities B

− Cash held as security, trapped or ring-fenced C

− Undrawn amounts a condition would block D

= Usable headroom today A + B − C − D

Headroom in week n = usable headroom + net cash flow to week n

Each deduction is a reading of a document. Cash posted as cover for a bank guarantee or a letter of credit is, in practice, out of the business's reach until the instrument expires or the cover is released. Cash in a subsidiary in a country with exchange controls is cash the group cannot spend, and the international accounting standard on cash flows asks for significant balances of that kind to be disclosed. On the facility side, an overdraft repayable on demand, or any uncommitted line, can be reduced at the bank's discretion, so a careful reading counts it at less than its limit or leaves it out. A committed line is firmer, but facility agreements commonly make each new drawing conditional on no default continuing, and a revolving line limited by a borrowing base shrinks when receivables or stock fall.

For smaller borrowers an industry code can narrow the default side. In Australia, the Banking Code of Practice limits the defaults other than non-payment that a bank may act on under a standard-form loan to a small business within the Code's size test, and a financial covenant breach is generally not one of them outside specialised lending such as property development or tailored cash flow lending. The manufacturer below borrows too much to fall within that test.

// 03 — THE EXAMPLE

A food manufacturer, constructed for this page like every figure in it, closes March with US$4.0m in the bank and a committed revolving facility of US$15m, of which US$8m is drawn. US$1.0m of the cash is held by its bank as cover for a guarantee given to a landlord, and US$0.5m sits in an overseas subsidiary that cannot send it home quickly.

Cash at 31 March 4.0

Undrawn revolving facility (15 − 8) 7.0

Headline headroom 11.0

Less cash held as guarantee cover −1.0

Less cash in the overseas subsidiary −0.5

Usable headroom at month-end 9.5

The forecast then runs the business forward. Week 7 carries a quarterly tax payment of US$2.4m, a payroll and the largest supplier run of the quarter. To the end of week 7, receipts total US$21.6m and payments US$29.7m.

Net outflow, weeks 1–7: 21.6 − 29.7 = −8.1

Headroom at week 7: 9.5 − 8.1 = 1.4

Headroom at week 13, after 4.9 net inflow = 6.3

Without the undrawn line: (4.0 − 1.5) − 8.1 = −5.6

At month-end the manufacturer appears to have US$11m of room, or US$9.5m once the security and the trapped cash are out. At its lowest week it has US$1.4m, about a third of an average week's payments. The last line is the lender's sensitivity: if a default stopped further drawings early in the quarter, the business could not meet week 7 from its own cash. None of these levels is offered as adequate or inadequate; they are the example's.

// 04 — WHAT A LENDER READS BESIDE IT

Headroom is often confused with working capital, because both get called liquidity. Working capital, and the current ratio built from it, compares assets that should turn into cash within a year with liabilities due within the year. A business can show plenty of it and have nothing to spend, because the asset is stock that has not sold or receivables not yet collected. Headroom asks what can be paid out this week, not what should come in eventually.

The other figure read beside it is the distance to the covenants. Headroom in money and covenant headroom in ratio points tend to fall together, and the second can remove the first, because a breach is often the event that turns an undrawn line into no line. A file that shows both, week by week, tells the reader whether the business will run out of cash or out of permission first.

DEFINED IN ONE PARAGRAPH → · THE 13-WEEK FORECAST → · THE MINIMUM A DOCUMENT CAN SET →

// 05 — WHERE IT DECIDES A FILE

In a healthy annual review, headroom is a line in the paper. In a business under pressure it becomes the paper. A lender deciding whether to grant a waiver, support a borrower through a breach or lend new money is first asking how many weeks the business has, and the forecast's low point is the answer. It also sets the timetable: the week headroom runs out is the week by which an equity injection, an asset sale or a refinancing has to land.

Headroom shapes the document too. A lender who sees a thin low point may ask for a liquidity covenant, more frequent forecasts, or a reporting trigger at an agreed figure. A borrower may ask for a larger line, or for a committed line in place of an on-demand one, so that the headroom counts. The directors' going-concern judgement rests on the same arithmetic, which is why the auditor and the bank often ask for the same forecast.

GOING CONCERN AND BANK SUPPORT → · THE WORKING CAPITAL REQUEST →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 107 Statement of Cash Flows (August 2015), the Australian text of IAS 7 — paragraphs 48 to 50 — Requires disclosure of significant cash balances not available for use by the group, with a subsidiary under exchange controls as the example, and encourages disclosure of undrawn borrowing facilities and any restrictions on their use — section 02.
Australian Banking Association, Banking Code of Practice (effective 28 February 2025) — paragraphs 85 to 92 and the definition of Small Business — Limits the non-payment defaults on which a bank will act under a standard-form small business loan, permits financial indicator covenants only for property development and specialised lending, and sets the turnover, staff and total-debt test for a small business — section 02.

// QUESTIONS PEOPLE ASK

How do you calculate liquidity headroom?: Add cash at bank to what remains undrawn on committed facilities, then take out cash the business cannot use, such as balances held as security or trapped in a subsidiary, and any undrawn amount a condition would block. That gives headroom today. To find headroom on the day that matters, run the figure through a cash flow forecast and read it at the lowest point, often a week when tax, payroll and supplier payments coincide rather than a month-end.
Does an overdraft count as liquidity headroom?: It depends on how secure the line is. An overdraft repayable on demand, like any uncommitted facility, can be reduced or withdrawn at the bank's discretion, so a lender may count it at less than its limit or not at all. A committed facility counts for more, though a new drawing usually still depends on no default continuing. Practice differs on whether uncommitted lines are included, so a headroom figure should say which lines it counts.
How much liquidity headroom does a business need?: No single figure suits every business. What matters is the business's own cash cycle: the size of its largest weekly outflows, how far receipts can slip, and how long it would take to raise more money if they did. A lender reads the forecast's low point against those things, and against how far trading could fall before that low point turns negative. Where a facility sets a minimum, the figure is a term the parties negotiated, not a standard.
Why is month-end cash a poor measure of liquidity?: Because many businesses collect much of their income near the end of the month and pay many of their bills during it, so the balance sheet catches cash close to its monthly peak. A business can report a comfortable balance at every month-end and still come within days of its limit mid-month, when payroll, tax and the supplier run fall due. A lender who needs to know how close it runs asks for a weekly forecast.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE NUMBER · THE LOAN · CAPACITY

A company asks to refinance. Its year in four numbers:

EBITDA: US$6m
Capex + tax: US$2m
Interest: US$1m
Principal due: US$2m

What is its debt service cover, on cash available after capital spending and tax?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE GLOSSARYIN ONE PARAGRAPHLiquidity headroom What is liquidity headroom, and how does a lender measure it?