Build Cash Reserves to Cushion Your eCommerce Business

Recently, Seth Godin published a short blog entitled Fill before empty. The entire post reads as follows:

“When the cost of topping off your battery is less than the catastrophic risk of running out of juice, it pays to add to your reserves.

That’s the entire point of having a tank. Going near empty isn’t nearly as effective as building up a cushion. Have your emergency on your own schedule.”

While everyone can benefit from this advice, eCommerce sellers, in particular, should pay attention and build up their cash reserves — and here's why.

Break That Bad Cycle

As you go into the busy selling season, you may be tempted to pay off all outstanding debt as you receive your payouts. While getting rid of debt is certainly a great goal, it can lead to a repeat of borrowing if you're not also building your reserve or adding to your tank.

I have worked with many clients that repeated the same cycle over and over: borrow to prepare for Q4, sell as much as possible (even at low margin), pay all debt, then repeat to prepare for the next Q4. It's time to break this cycle.

Put Your Cash to Work

I recommend first understanding your product profitability and developing a strategy that considers both your inventory levels and your ad costs to ensure that you keep your margins as high as possible. Next, look at your product mix and understand your best use of cash.

You may be buying inventory that takes your cash but provides little profit or has slow sales. Ensure you're putting your cash to work. If the product isn't going to move, or if you're going to make a low margin, restructure your product mix.

Add to Your Tank

Once you have taken these steps, you are ready to develop a strategy to repay your debt and grow your eCommerce cash reserves. You want to grow your reserves so you can use them in an emergency.

With all the issues surrounding supply chains, Amazon storage, suspensions, etc., it's easy to imagine how the train might jump the tracks. A best practice is to build your reserve and pay down your debt at the same time. It won't happen overnight, but ideally, you will want to accumulate 3-6 months of expenses in your reserve account.

As you accomplish this, you will get more frugal, efficient, and innovative with your spending. And this is a bonus—not only are you accumulating an account to help you manage in an emergency, but you are also monitoring and managing your spending more effectively. With profitable products and a successful product mix, you are also increasing your sales. Increased sales and decreased expenses result in more money in your pocket. When this happens, you are in a better position to reduce debt and grow reserves.

Reap the Rewards of Your Cash Reserves

As you begin to ramp up for your next Q4, look at the funds you have in your cash reserves. Do you have excess that can be used to pay for inventory, avoiding the need to borrow or at least reducing the amount you borrow? It might take you 3-4 selling seasons to accumulate all of the funds you need, but as you do, you will reap the rewards of having a debt-free business. Give some thought now about how you're going to handle your debt and build your reserves. Perhaps make the minimum payments until you've had a chance to fully develop your strategy.

Buying yourself time is always a good investment, and filling your tank so you can "have your emergency on your own schedule" will bring you peace of mind and set you up for success for the year to come.

If you need help getting your Amazon business where you'd like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers.

You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, and founder of bookskeep, I will explain why Profit First works so well for eCommerce businesses and the particular challenges for businesses that have physical products requiring inventory management.