How much cash should I keep aside for refunds?

Refunds do not arrive on a schedule. A week with several returns can leave you short exactly when you need to buy stock or pay a courier. A refund reserve is a simple habit of setting money aside every month so a refund never has to come out of your working cash.

The formula

Refund reserve equals monthly sales times your expected refund rate.

The refund rate is the share of sales you expect to give back. You need an honest guess for it. Look at the last few months of your orders, count refunds and returned orders, and divide by total orders or by sales value. If you are new and have no history, start with a cautious guess and adjust after two or three months.

A worked example

Say your monthly sales are Rs 70,000 and you assume an 8 percent refund rate.

• Rs 70,000 times 0.08 is Rs 5,600.

So you set aside Rs 5,600 each month. If refunds in the month are smaller, the unused amount stays in the reserve and builds a buffer. If they are larger, the reserve covers the gap.

What if the rate is higher

Now suppose your rate is closer to 15 percent, perhaps because you sell clothing with fit issues or fragile items.

• Rs 70,000 times 0.15 is Rs 10,500.

The reserve almost doubles. This shows why the guess matters. A 7 point difference in rate moves the reserve by Rs 4,900 on the same sales.

What counts as a refund here

Be broad. Include:

• Full refunds on returned orders.
• Partial refunds for damaged or missing items, see issuing-a-partial-refund-for-missing-items.
• Cancelled prepaid orders that you have to pay back.
• The cost of returned shipping if you pay it.

COD orders that are refused at the door usually do not need a refund of money, since the customer never paid, but they still cost you shipping both ways. That is a loss to track separately. See cost-of-one-refused-cod-order.

Where to keep the reserve

Keep it somewhere you will not spend it by accident. A separate savings account or a separate UPI handle for the shop works. If you mix it with your day to day cash, you will spend it on stock and feel surprised when a refund arrives.

Lowering the rate lowers the reserve

The best way to reduce the reserve is to reduce refunds. Common fixes:

• Better photos and accurate descriptions, see describing-colour-accurately-online.
• A clear size chart for clothing.
• Safer packing for items that break.
• Honest delivery timelines.

Each of these cuts returns, and every rupee of avoided refund is a rupee you do not have to set aside.

A short routine

1. Work out your refund rate from the last three months.
2. Multiply by this month's sales to get the reserve.
3. Move that amount to a separate account when you pay yourself and your suppliers.
4. At the end of the month compare actual refunds with the reserve and update your rate.

Refunds are a normal part of selling online. Planning for them turns a surprise into a line in your budget, and it keeps your relationship with customers calm, since you can say yes to a fair refund without worrying about the cash.