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The Bank of Distribution

The Bank of Distribution

By Bridget McCrea

As vice president and chief financial officer (CFO) at BJ Electric Supply, Inc., in Madison, Wis., Maureen “Mo” Barsema knows a thing or two about deftly navigating that fine line between “supplier invoices” and “customer payments.” Not always properly aligned in the electrical distributor’s favor, this delicate balance can quickly put even the most diligent company in the position of having to “rob Peter to pay Paul,” when payment terms, credit lines, and financial issues don’t work in its favor.

The good news is the that the industrial distributor’s role remains solid, despite the various competitive pressures that NAED members may be dealing with right now. In fact, its role in the “financial supply chain,” so to speak, is stronger than ever. “The electrical distributor plays an incredibly important role,” says Barsema “by serving as the cash conduit [for] the 3-legged stool of the manufacturer, electrical distributor, and the contractor/owner.”

As former NAED Chair, Barsema also knows that serving as the “bank of distribution” is a role that many industrial distribution firms take on when they go into business. “This continues to be an ongoing concern for NAED members,” says Barsema. “As long as we choose to participate in supporting the electrical contractors that we serve, and the manufacturers that we represent, we’ll always serve as banks.”

The financial intermediary position can be a double-edged sword for the electrical distributor that gains some control of the transaction (due to its financial involvement in it) while also taking on increased risk along the way. As you’ll read in this issue, even in today’s “recovering” economy, a growing number of suppliers are asking for tighter payment terms while customers are requesting longer payment timelines. Caught in the middle of these two important business partners, the distributor can quickly find itself dealing with significant cash flow problems as a result.

To offset these and other financial challenges, Baresma says companies should always use their own best judgment to mitigate risk. At BJ Electric, for example, she says the team strives to maintain a “complete understanding of the cash flow line between ourselves, the manufacturer, and the customer.” When taking on new customers, the company does due diligence to find out exactly what type of firm it will be dealing with, extending credit to, and/or providing services to. On larger jobs, she says the due diligence extends out to all of the contractors and subcontractors on the job.

“We have to understand all of the players on that job, including who the general contractor is, who the subcontractors are, and who the ultimate job owner is,” Barsema explains. “We also have to understand who is handling the cash – the general, the sub, and/or the owner? Depending on the answer to that question, we look closely at the company’s financial stability, payment capabilities, and history.”

In most cases, on large jobs the electrical distributor is most closely aligned with the electrical contractor. In some cases that role is filled by the general contractor – but rarely by the project owner. “When we’re getting into these jobs, it’s important that our entire team – including our salespeople – be aware of all of the players and their respective roles on the project.”

Historically known for their ability (and willingness) to extend credit, industrial distributors must also understand the risk involved with taking this step. Ignore this important step, says Barsema, and it won’t be long before major cash flow issues start to surface. By simply understanding the mechanics behind a “draw schedule” on a job site (defined as a detailed payment plan for a construction project, including bank disbursements, etc.), a distributor can more accurately predict payment receipt dates and pinpoint potential issues before they become problematic.

To conduct due diligence on new jobs, Barsema suggests reviewing the job information sheet (which is developed for most jobs) and using it as a reference point for information on the various entities involved with the project. This sheet should include data on who is paying the bills and who is receiving the bills, the terms of the jobs, all of the purchase orders and their values, terms, and conditions.

Understanding any disparities between expected payments and supplier payment expectations is also critical. “Generally, we find that the cash cycle on jobs tends to be more in the 50- 60-day range, whereas manufacturer terms are generally 30 days,” Barsema says. “The question is, do you have the financial wherewithal to ‘float’ the customer for that 30-day interim period? That’s where the bank of distribution issue really starts to come into play.”

And while going back to the manufacturer to ask for additional time may seem like an obvious option, Barsema points out that many manufacturers won’t readily “give up terms.” That’s because once they take this step with one distributor, they’ll have to extend the same terms to all of them. 

“It just becomes a good practice for manufacturers to stick to their original terms,” says Barsema. And while there may be extenuating circumstances to support a different approach, terms and/or conditions, for the most part the agreed-upon arrangements must be adhered to. So, rather than rely on a possible shift in those terms, Barsema says distributors are better off “understanding all of the terms and conditions before getting involved with any sized job.”

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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