Successful eCommerce sellers understand how important cash flow is. It’s the lifeblood of your eCommerce business, keeping a healthy amount of money flowing through each stage of the sales cycle to drive profits. Struggling cash flow is what keeps eCommerce business owners up at night and healthy cash flow allows them to rest easy. Cash flow keeps the heart of your business beating so that it can operate at maximum efficiency to generate sales and increase your bottom line.
When it’s healthy and optimized, cash flow can propel your business toward its fullest potential by allowing you to take advantage of every growth opportunity available. However, it’s common for eCommerce businesses, including successful ones, to face cash flow problems that stunt your growth.
The rate at which cash hits your business bank account determines how often you can restock inventory, if and when you can launch new products, and whether or not you can run marketing campaigns – all critical components of growing and maintaining your eCommerce business. Due to delays from account level reserves on many eCommerce marketplaces, there is a common lack of synchronicity in the money entering and exiting your business, which can create cash flow hiccups.
If money is entering and exiting your business at different speeds, you will inevitably face some cash flow challenges. What’s important is that these challenges aren’t exacerbated to the point of your cash flow dropping into the negative, causing your business to lose money.
So how do you avoid these cash flow challenges and maintain a healthy, positive cash flow despite delays in returning profits? That’s where your “Sleep Well at Night” number comes in.
What is a “Sleep Well at Night” number?
To avoid the constant stress of cash flow crunches, many successful eCommerce sellers have begun to establish what’s called a “Sleep Well at Night” number. As the name suggests, the “Sleep Well at Night” number is the amount of capital that you need to have available for your business at any given moment to rest easy.
The “Sleep Well at Night” number is ultimately a pool of dollars that can serve as a buffer, reserved to ensure that your cash flow never dips into the negative again. Even if something were to happen to the business, this buffer prevents your cash flow from rapidly going negative and facing those hiccups that create cash crunches.
Over time, your mindset should also shift from anxiety about cash flow negative periods to a reasonable concern of buffering negative periods.
How do you build a buffer to “Sleep Well at Night”?
Your “Sleep Well at Night” buffer is built up of capital that is readily available at any given moment. Rather than constantly circulating all the money available, your “Sleep Well at Night” number is set aside in case something were to happen.
The Steps to Sleeping Well at Night
- Decide on your “sleep well” number based on your business’ size and sales record. Consider how much capital you would need to solve various problems if they were to arise.
- Create your cash flow plans so that you never dip below your “sleep well” number. Use cash flow forecasting tools to best optimize and understand what your money will look like over time.
- Build your “Sleep Well at Night” buffer over a period that is doable for your business. Allocate a percentage (typically 3%-5%) of your total sales per month to go into your “sleep well” fund, rather than being immediately reinvested.
- Begin to think in terms of months with negative cash flow buffers, rather than months with negative cash flow.
- Start reframing your mindset around debt to accommodate for external funding that can help provide your business with necessary capital to grow.
Your “Sleep Well at Night” number will evolve as your business grows. Unfortunately, the bigger your business gets, the more expensive your problems become also. As a result, the problems that a 40K buffer solves in years one and two may take 100K to solve in year five.
Resources to Improve Your Rest
Although similar to an emergency fund, your “Sleep Well at Night” buffer is slightly different because it isn’t necessarily made up entirely by money sitting in your business bank account. Your “Sleep Well at Night” number is working capital that you have access to– it can come purely from your profits, from external funding, or a combination of both.
Many sellers take advantage of external funding, like Viably, when building up to their “sleep well at night” number. Supplemental eCommerce funding helps boost your cash flow and eliminate those hiccups that stunt growth–pushing money into and 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.
Even eCommerce businesses with healthy, positive cash flow can benefit by maximizing profits with the boost that funding alternatives provide. Successful sellers are prepared for changes in the market and use buffers, like a “Sleep Well at Night” number to provide stability even in times of economic stress.
