8 Ways for Distributors to Preserve Cash Flow in a Slowing Economy

What is Cash Flow?

The total amount of money received and doled out over a given period (usually a quarter), cash flow can either be positive or negative. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges.

Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress. Once the money going in and out of the business has been calculated, companies can come up with a “free cash flow” number or FCF. This is the money that the distributor has left over to expand the business or return to shareholders, after paying dividends, buying back stock, or paying off debt.

Wholesale Distributors Are in a Sticky Spot

Because they effectively bridge the gap between manufacturers who make products and the end user customers that need those goods, wholesale distributors can find themselves in a sticky spot on the cash flow spectrum. This can turn into a more serious problem when economic conditions begin to soften.

Here are eight steps distributors can take now to start preparing for a more challenging economy:

1. Spend your pennies wisely. While it may be tempting to view everything as an “investment”, smart companies look at whether those expenses are absolutely necessary… or not. If that additional employee, warehouse expansion or new storeroom floor isn’t going to positively impact your bottom line over the next 6-12 months, you may want to put a pin in that idea until the economy stabilizes.
2. Open a business line of credit. “Set up a line of credit while you’re flush with cash,” software provider Logiwa advises. “Banks won’t be as willing to help you out when your business is struggling, so it’s best to arrange a line of credit in advance.” It’s important to note that this doesn’t displace the need to maintain a positive cash flow, but it is an additional way to make ends meet when sales pipelines start to slow.
3. Use an inventory management system. By their very nature, distributors have a lot of resources tied up in inventory. Some track inventory by hand, others use spreadsheets and others do it through their enterprise resource planning systems. Another good option is a robust inventory management system that can be used to track inventory in real-time, set reorder points, manage barcode or RFID scanning and/or integrate with existing distribution systems (i.e., a warehouse management system). “Connecting your IMS to other ERP systems streamlines workflows, maintains the accuracy of your data and leads to efficiencies that generate cost savings,” Logiwa points out.

“When growth slows, looking at internal investments to improve your inventory position and cash flow can be the difference between making a plan or missing it.”

1. Stay on top of your receivables. Run a report and determine which customers are paying on time or in arrears. Call any that fall into the second category — and particularly those that have already or are close to extending past the agreed-upon terms — and start collecting. “Offer incentives for companies that pay their invoices early and follow through with charging the interest or late fees outlined in your original contract,” Logiwa advises. “This will discourage customers from paying you late.”
2. Use technology to get your money faster. By delivering invoices electronically rather than via mail, you can speed up billing and collection. By implementing a vendor portal, you can give vendors electronic access to invoices, enable electronic payments and reduce the time it takes to resolve disputes. “These solutions also tend to provide organizations with timely and robust reporting that can help you take proactive steps to resolve delinquent accounts or take advantage of supplier discounts,” Deloitte advises.
3. Understand your expenses. In MDM’s Operating in a Downturn: Avoiding the Mistakes of the Past, distribution expert Albert D. Bates gives distributors pointers on how to prepare for a potential “slower growth” period. As part of that process, he tells companies to look carefully at their fixed and variable expenses and ensure that they fall within these ranges:
   1. Fixed expenses are “overhead expenses.” The key factor is that once a budget is set for
      the year, these expenses will only change if management takes specific actions to change them, such as negotiating a lower rent. For most firms, fixed expenses represent somewhere around 80% of total expenses.
   2. Variable expenses, in contrast, rise and fall automatically as sales rise and fall. They
      include sales commissions, interest on accounts receivable and the like. For the typical firm variable expenses are estimated to be 5% of sales.
4. Don’t hoard your cash. A common reaction to declining sales, hoarding cash is a no-win proposition during a downturn. “Inevitably, this leads to converting inventory and accounts receivable into cash,” Bates says. In fact, lowering inventory almost always involves a “stop buying” edict that causes the firm’s service level to deteriorate. “Accounts receivable reductions have a similar impact on sales,” Bates cautions. “Lowering either of these will simply drive sales down at a faster rate.”
5. Use good forecasting practices. An important aspect of cash management and profitability, forecasting involves looking at both income and cash flow statements and linking your cash flow forecasts to key working capital metrics from the balance sheet, such as DIO (days inventory on-hand), DSO (days sales outstanding), and DPO (days payables outstanding). Deloitte tells firms to also include capital expenditures, debt repayments and other operating cash flows into the equation. “To enhance the accuracy of these forecasts, consider automating this process rather than relying on error-prone and labor-intensive spreadsheets,” the firm advises. “Also, be sure to integrate cash flow forecasting with your profit & loss (P&L) statement and balance sheet so you can track performance against a range of indicators.”

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