How to Build in Financial Security for Your Ecommerce Business

As you begin to scale your ecommerce business sustainably with funding, it’s critical that you continue to mitigate risk wherever possible. Although some risk is necessary for a growing ecommerce business, it’s important to have safeguards in place to help ensure agility and resilience against unforeseen challenges. This is especially important when it comes to your cash flow. We’ve previously discussed how cash flow is the heart of your ecommerce business, ensuring that it can continue operating and generating sales to grow your bottom line, which means that challenges posing significant risks to your cash flow need to be addressed quickly and efficiently. 

One of the best ways to mitigate cash flow risks and create a healthy sense of financial security for your ecommerce business is to create cash flow reserves. Although you may have spent the early stages of your ecommerce business reinvesting every spare penny into inventory, now is the time to start thinking about the future of your business. Now, with greater access to working capital, thanks to strategic funding partners, you can feel confident diverting a small portion of your cash flow into business savings accounts won’t create a temporary financial hiccup. 

In our previous blog, we covered what it means to scale sustainably and how to acquire funding that fits the needs of your ecommerce business. Now, with supplementary working capital to support your growth, we’ll use this blog to discuss how to improve the agility and resilience of your cash flow with reserves. By setting aside additional pools of working capital in case of an unexpected challenge, you’ll lower your ecommerce business’ overall risk and better protect its future. Let’s dive in! 

Importance of Cash Reserves for Ecommerce Businesses

After devoting so much time to ensuring that every dollar is constantly working for your business, it might seem counterintuitive to keep a portion of your profits in reserve. Unfortunately though, the reality is that ecommerce tends to be a volatile industry. In order to maintain financial security, it’s important that your ecommerce business maintains a strong level of agility. The more flexible your business when it comes time to deal with unanticipated challenges, the more you’ll be able to adapt quickly and survive upsets. With cash reserves on hand, you’ll have the liquidity to adjust and move freely while competitors scramble for capital. 

Types of Cash Reserves

Not all business reserves are built equally, so it’s important to invest in those that accommodate your needs and are easily accessible. It’s important that when you’re building reserves for your ecommerce business you ensure that they’re cash– in the case of urgent circumstances you don’t want to have to waste time liquidating assets. The two main types of cash reserves for ecommerce businesses are an emergency fund and a “Sleep Well at Night” buffer, both of which help to keep your business afloat during stressful times. 

Emergency Fund 

A business emergency fund is almost exactly what it sounds like: a savings account that is specifically for your business and designed to be used only in the case of emergencies. Just like any other business bank account should never have any personal funds associated with it in order to avoid confusion. Emergency funds are typically reserved for circumstances that are unexpected to some degree, such as: 

• Repairing or replacing damaged equipment.
• Covering payroll when cash flow is struggling. 
• Unexpected closure due to natural disaster, pandemic, or other circumstances.
• Supply chain issues slowing down inventory and cash flow.

Many ecommerce sellers experienced some of these issues firsthand in the past five years, proving just how important it is to prepare. However, you never know what issue is going to arise–making it difficult to have a clear plan in place. That’s where emergency funds can help. By having working capital already on hand and available to tackle whatever challenges arise you’ll ensure that your business can respond swiftly and without financial difficulties. 

Sleep Well at Night Buffer 

Similarly to an emergency fund, a “Sleep Well at Night” buffer is a pool of cash kept in reserve to be used in less than desirable circumstances. However, while an emergency fund is designed for unanticipated circumstances, your “Sleep Well at Night” buffer exists to help alleviate financial stress from fluctuations in month-to-month sales. 

As its name suggests, a “Sleep Well at Night” buffer serves as a cushion against ever having a cash flow negative month again. Even if your sales were to take a hit, this buffer prevents your cash flow from rapidly going negative and creating those hiccups that turn into cash crunches. By creating this type of reserve to buffer against slow months, your mindset will shift away from anxiety about high-risk cash flow negative periods to a more reasonable concern of buffering negative periods. 

How much money should be in my reserves? 

Since each business is different, there’s no one “right” amount to keep in your reserves. On top of this, the intent for an emergency fund and a “Sleep Well at Night” buffer are different, meaning that they’ll require different levels of investment. 

For an emergency fund, a good rule of thumb is to maintain three to six months worth of operating expenses in savings. This may seem a bit excessive, but it’s important to have a serious cushion in case of tough times and you’d rather have too much than not enough. The amount in your “Sleep Well at Night” buffer, on the other hand, should be based on your sales record. Think about how much money it would take to create a cash flow hiccup for your ecommerce business and start there. 

Regardless of how much you choose to save in your reserves, it’s unlikely that you have that much cash available to comfortably set aside immediately. That means it’s time to start setting aside money from each payout for your reserves. 

How do I build up a reserve fund? 

Any reserves that you have for your ecommerce business should be built up of capital that’s readily available and accessible at any given moment. Rather than constantly circulating all the money your ecommerce business has available, cash reserves are set aside in case something were to happen. We recommend following these steps to build up reserves slowly overtime to ensure that they don’t create financial pressure on your business: 

1. Decide on how much money you want to go into your reserve. This should be based on the size of your ecommerce business and its sales record. Consider how much capital you would need to solve various problems if they were to arise. 
2. Create your cash flow plans so that you can visualize what the next few months will look like for your business, assuming nothing unexpected happens. Cash flow forecasting tools will help you optimize your money to get a full understanding of your financial picture. 
3. Build your reserves over a period that’s reasonable for your business. Don’t just take a huge chunk of cash out of your next payout, that’s a surefire way to create cash flow problems. Instead, allocate a percentage of your total monthly sales (typically around 3%-5%) to go into your desired reserve. 
4. Consider working with your strategic funding partner to supplement cash flow and your reserves with extra capital. By reframing your mindset around debt and taking on healthy risks, like sustainable funding, you’ll provide your business with the necessary support to grow. 

Remember, the reserves for your business will grow alongside your sales. Unfortunately, the larger your business gets, the more expensive problems tend to become. The price of a problem in year one will likely increase by year four or five, so be sure to continuously revisit and reinvest in your reserves. 

Many sellers take advantage of their ecommerce funding partners, like Viably, when building up reserves. Supplemental ecommerce funding helps boost your cash flow and eliminate those hiccups that stunt growth–pushing money through your business quickly and efficiently. As your sales increase you can then set aside that percentage toward a buffer that helps you rest easier. 

Viably is a people-first banking and funding experience, designed to help ecommerce sellers grow their business the way they know best. With tailor-made funding offers, you can have the working capital you need to build up the cash reserves in your business bank account as soon as tomorrow.