By Bridget McCrea
Distributors face some unique cash flow challenges that other companies don’t necessarily deal with. Shoehorned between customers that are having a hard time making their own ends meet and suppliers who have tightened up payment terms, distributors that ignore the need for cash flow management can quickly find themselves up against major challenges.
“Distributors never have enough cash,” says Al Bates, president of Profit Planning Group in Boulder, Colo. “Cash flow management is an ongoing issue for them in any economy.” The fact that banks aren’t lending money as freely as they once did has only exacerbated the problem, says Bates, and put even more pressure on distributors that are grappling with lower sales volumes and more frugal customers.
The good news is that there are some tried-and-tested strategies that distributors can use to ease themselves out of this sticky situation and get back into positive cash flow territory. Here are five ways to do that:
- Recognize that there is a problem. Hiding from bill collectors and hoping that your lines of credit will hold up even if you don’t pay the minimum amounts due won’t get you out of a cash crunch. Bates says recognizing the signs early – namely, the inability to cover bills and payroll – and addressing them head-on is much better than hiding your head in the sand. “Most distributors are continually tight on cash,” says Bates, “but if you find yourself passing on cash discounts or drawing up your line of credit, you’re probably dealing with a more serious issue.”
- Consider a slower growth strategy. The best way to achieve a great cash position is to grow at a manageable rate without having to invest in the inventory and personnel needed to support a higher growth rate. “Distributors don’t really want to hear that, but by growing at a slower rate you can preserve your cash and invest some of it back in the company,” says Bates, who sees the rising, recovery-related demand for goods as a double-edged sword for distributors. While higher order volumes are clearly a positive sign, he points out, “the need to scale up quickly to meet that increasing demand could hamper distributors’ cash flow management strategies.”
- Look for assets that can be converted into cash quickly. Once you’ve identified the cash flow problem, start looking for assets that can easily be transformed into cash. “The two most obvious cases are inventory and accounts receivables,” says Bates, who sees the former as a good starting point for most companies. “Distributors tend to have a fair amount of dead inventory in their warehouses,” says Bates. “Even though they won’t get full cost out of it, it’s better to get 50 cents on the dollar today for it than $1 ten years from now.” Consider unloading the dead inventory in order to generate additional cash, says Bates, even if it means taking a slight loss on the sale.
- Look for ways to increase profits. While Bates sees accounts receivables management as a good cash flow strategy, he points out that the goal really should be to drive higher profits, not just lower A/R. By finding creative ways to increase profits – by, say, offering value-added services that customers will pay for – companies can position themselves as profit leaders in the electrical distribution industry.
- Don’t rely on lines of credit and other crutches. Distributors can quickly bury themselves by racking up debt via lines of credit and other financial crutches. “A lot of banks aren’t even loaning to distributors anymore and for some companies that can be a life-or-death issue,” says Bates. “By using a systematic approach to raising profits, managing A/R, and offloading dead inventory, distributors can avoid this trap and position themselves as financially-independent organizations.”
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.