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5 Ways to Close the Middleman Cash Flow Gap

By Bridget McCrea

In the tED magazine article What Keeps You Up At Night?, Doug Borchers, vice president at Dickman Supply in Sidney, Oh., vented about how some of his distributorship’s customers were extending their own payment terms to extra lengths. “It’s nothing anymore to get a form letter that they’re arbitrarily stretching out their days-payable an extra 15 days, or that in order to do business with them we have to own the inventory in their facilities on consignment,” Borchers says.

“The latter allows them to take $100,000 of assets off their books and put it right on our books instead,” Borchers continues, adding that on the other side of the equation, manufacturers are holding fast to their terms. “‘You must pay within 30 days, sorry no ifs, ands, or buts.’ they’re telling us. So while our end customers are taking a longer time to pay their bills — and want us to own inventory on their sites — that financial burden is now on us. We’re caught in the middle.”

Between a Rock and a Hard Spot
Being “caught in the middle” isn’t a new feeling for the typical distributor, but it can create some serious cash flow issues. “All companies are challenged by cash flow problems, which can be a particularly big hardship on the middleman who is trying to do a good job while being squeezed by two different entities [i.e., customers and suppliers],” says Debra Robinson, a cash flow analysis expert and owner of Centennial Revenue Management in Centennial, Col.

Here are five useful cash flow management strategies that distributors can start using today to help close the cash flow gap and get a better handle on incoming payments, deposits, and other variables:

  • Start asking for deposits. Distributors have traditionally shouldered the burden of ordering equipment and parts, storing those items, selling them on a terms-based program, and then paying for them according to their own suppliers’ terms. This arrangement can put a major strain on the middleman, who is stuck holding the bag on both ends for at least a short period of time, if not longer. One way to tackle the problem is by asking for a percentage of the total order cost upfront. “Start asking for deposits,” says Robinson. “That helps collect some of the money upfront, helps your customers get a little skin in the game, and puts some money in the bank long before the 30- to 90-day payment terms come due.”
  • Put a good collection process in place. Even your best, longest-term customers need a little nudge once in a while. Rather than waiting for payments to become past due, Robinson suggests sending out reminders as early as a week after the invoice has been submitted. Remind customers that they have a payment due, how much it is, and when the due date is. Don’t be afraid to remind them about any finance charges for late payments (something you should also be using, if you aren’t already), and about any discounts that apply if they pay early (see next tip). This is particularly important because “the longer an account remains unpaid, the lower the probability of collection,” according to the Commercial Collection Agency Section of the Commercial Law League of America. (At three months delinquent, 27% of accounts receivable will not be collected; at six months delinquent, 43% of accounts receivable will never be recovered; and at 12 months delinquent nearly 75% of delinquent accounts will have to be written off.)
  • Offer discounts for early payments. Early payment discounts allow your customers to save a little money while putting more cash in your distributorship’s hands and much earlier than you would typically expect. An electrical distributor selling on credit, for example, can offer its customers terms such as 1/10, net 30. Put simply, the customer will be able to deduct 1% of the amount owed on an invoice if payment is made within 10 days. “This is a very good way to get customers motivated to pay earlier than they typically would,” says Robinson. “If I was working in an accounting department and a supplier offered me a discount to pay net 10 days, I’d take it.”
  • Hold strong on policies and terms. Companies usually develop policies with good intentions of enforcing them, but then they wind up “bending the rules” to accommodate certain client requests and issues. While this level of flexibility may be warranted in some situations, the distributor that loosens the reins too much – and too many times – can quickly find itself struggling to catch up on the financial front. “Come up with some clear policies,” Robinson suggests, “and then make sure you hold strong on them.” It also helps to understand that everyone is in the same boat right now in the attempt to pay their bills as late as possible and extend their own credit terms in the most limited manner possible. Adopting a similar mindset can help. “Focus on getting your money coming in as quickly as possible and the money you owe going out as slowly as possible,” says Robinson. “This simple mindset adjustment can be really helpful in closing the cash flow gap.”
  • Keep tabs on a daily basis. Don’t wait for your accounting system to start throwing up red flags about overdue accounts, says Robinson. Instead, keep tabs on all receivables on a regular basis – preferably daily. Have your accountant, accounting clerk, administrative assistant, or other individual get in the habit of reviewing all outstanding debt on a daily basis to see what can be followed up on, where payments are, and/or how long it will be before those payments are made. On the other side of the equation, do the same thing with accounts payable reports in an effort to balance out the flow of “money in/money out.” This will help you avoid getting caught off guard by large supplier bills, or at least ensure that you have ample funds in the bank to cover them. “Pull in the reins and watch the actual movement of money through your company,” Robinson says. “This can really help you gain better understanding of, and make better decisions around, cash flow.”

 
Looking for more information on how to get a handle on your distributorship’s cash flow management challenges? Check out these two online resources:            

40 Ways to Improve Cash Flow

  1. Have a cash plan for your business. It is hard to improve if you don’t know where you’re at.
  2. Collect your receivables.
  3. Eliminate delays in invoicing – get them in the mail as soon as possible.
  4. Request progress payments on large orders.
  5. Time your invoices to coincide with your customer’s payment schedule.

Read the complete article here.
 
7 Cash Flow Management Tips for Small Business Owners
 
Converting sales into cash as quickly as possible, while reducing and extending your payments to build a cash cushion, is the basis for long-term, sustained growth, whether your company is large or small. Implementing some or all of the following suggestions can help boost your cash flow.

  • Anticipate Future Needs
    Avoid surprises. There is nothing more difficult or disheartening than searching for cash when you’re desperate.
  • Build Connections With Lenders
    The odds of being able to borrow cash or entice investors to put more money in your company when you absolutely need it are low.
  • Keep Your Cash Working
    Keep your cash balances in interest-earning accounts, which are available at most banks.

Read the complete article here.

McCrea is a Florida-based writer who covers business, industrial, and educational topics for a variety of magazines and journals. You can reach her at bridgetmc@earthlink.net or visit her website at www.expertghostwriter.net.

 

 

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