By Bridget McCrea
With manufacturers tightening up their terms and customers asking for more time to pay their bills, now is the time for electrical distributors to assess and hone their own cash flow management strategies.
Nothing can bury a business as quickly as poor cash flow management can. As the middlemen who operate between suppliers and end users, distributors are particularly prone to this challenge, which can leave the facilitator holding the bag on both ends. On one side of the equation is a supplier that wants to get paid as quickly as possible for goods and services, and on the other side is a customer that would like to see payment terms strung out as far as possible. In between this tug-of-war is the electrical distributor that wants to pay – and be paid – within a desirable time frame in order to keep its own lights on, so to speak.
“This is an issue that we deal with on an ongoing basis,” says Rocky C. Kuchenmeister, general manager at K/E Electric Supply Co., in Mt. Clemens, Mich. “Inventory turns are definitely getting tighter on the manufacturing end, and the sales cycle is clearly lengthening.” Kuchenmeister points out that while most distributors are well-adapted to handle tight inventory turns (“That’s why we’re distributors,” he points out, “otherwise contractors would just buy directly from the manufacturers”), the extension of the typical contractor’s sales cycle is presenting challenges in the current market.
“We’re seeing what used to take 30-60 days turn into 90-120 days – or even worse – in terms of the typical sales cycle right now,” says Kuchenmeister. “That definitely puts pressure on us to hone our own cash management approach, what with much of the money being held longer by the general contractor, electrical contractor, and/or owner.”
Knowing that many other NAED members can probably commiserate with K/E Electric, tED magazine spoke with a few other distributors and also gathered some expert tips on how to address this challenge head-on. Here are five cash flow management tips that you can start using right now:
- Start with an honest assessment of your billing and payment processes. With the economic recovery in full swing and many construction projects coming out of “mothballs,” it’s easy to get caught up in all of the busy work and neglect to keep good track of your accounts receivables and payables. To avoid this problem, start by looking at where your cash flow currently stands (no matter how disheartening that picture may be) and how it may change (either positively or negatively) in the future. Did a rapid growth in orders leave your coffers lower than usual? Are your customers’ payment terms negatively impacting your firm’s bank account? Did you have to hire new employees and take on a higher level of inventory in order to handle business growth? These and other activities can leave the distributor blindsided and unable to effectively manage its own cash flow. The good news is that it doesn’t take a fancy software program or an expensive accounting professional to pinpoint the problem: do a simple and honest cash flow projection for the next 6-12 months on a spreadsheet and the “red flags” should start to appear pretty quickly.
- Don’t be afraid to ask yourself the tough questions. If you’re robbing Peter to pay Paul even when business is good, then it’s time to ask yourself a few tough questions, including: How long is it taking for customers to pay their bills? What are we doing in terms of collections activity? Is this activity working, or not? Are we identifying disputes and queries quickly enough? What is our policy for resolving these issues promptly and effectively? Are we reaching out to our customers soon enough in the collections process (the longer you wait to do this, the longer it will take to get paid in most cases)? By answering these tough and telling questions you’ll come away with a good idea of exactly where the gaps are in your cash management process.
- Unload any excess inventory or equipment. Industrial distributors are notorious for keeping excess stock in the storeroom for those “just in case” moments. In 20 Ways to Manage & Increase Small Business Cash Flow, Money Crashers’ Michael Lewis points to the sale of excess or obsolete equipment/inventory as an effective cash management strategy. “Idle, obsolete, and non-working equipment takes up space and ties up capital which might be used more productively,” Lewis writes, noting that equipment that has been owned for a longer period will usually have a book value equal to its salvage value or less, so a sale might result in a taxable gain. “Excess inventory can quickly become obsolete and worthless as customer requirements change and new materials are introduced. Consider selling any inventory which is unlikely to be used over the next 12 months unless the costs to retain it are minimal and the proceeds from a sale would be negligible.”
- Come up with ways that entice customers to pay sooner. One of the best ways to pump up a distributorship’s cash coffers is by speeding up the accounts receivable process. One way to do this is by offering discounts for early payment – an enticement that customers may not be able to resist. “We’ve been offering additional discounts, such as 1% net 30 (versus the typical 1% net 10),” says Brad Van De Sompele, president at Frontier Electric Supply in Bensenville, Ill. In addition, he says the distributorship has adopted credit card payment policies for orders that fall under a certain threshold. This has helped to free up cash and minimize the time it takes to get paid. Finally, he says the company is more selective about extending credit terms to new customers. “We do a much better job of looking at creditworthiness upfront,” says Van De Sompele, “so we don’t have to spend months chasing down a one-time customer who places a $600 order.”
- Look outside of your own company for benchmarks. Knowing the numbers for your competitors and your industry overall can help put things in perspective on the cash flow management front. Does your cash flow forecast fit with applicable and relevant key industry ratios? Why or why not? Where are you stronger than the norm? Weaker? Why? “Bankers and lenders that regularly provide capital to your industry will be very familiar with these numbers, and you need to be as well,” according to American Express’ Managing Your Cash Flow Better in 2015.
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 firstname.lastname@example.org or visit her website at www.expertghostwriter.net.
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