Proper cash flow management is the core of your distribution businesses. It’s necessary to ensure all operations are sustained effectively.
However, running a distributor business is no joke because you often face cash flow challenges due to inventory expenses, demand fluctuation, tight margins, and much more.
Here’s a comprehensive guide to help you overcome common challenges and keep your business running smoothly.
1. Analyze Your Cash Flow Regularly
When facing cash flow challenges, most businesses try to reduce expenses. But let’s be logical: several expenses help your business make profits. If you cut the budget for them, you will reduce your profits.
Instead, take a deep dive into your cash flow statements to see where the money is coming from and going.
Track your revenue streams and expenses to pinpoint any issues or trends that need attention. Conduct this assessment regularly to identify peak and slump seasons. You will also be able to predict future cash flow trends.
2. Optimize Inventory Management
Excess inventory is a huge reason behind drained cash flow. If you collect excess stock, you also hold a significant amount of your capital, and this money can be used in other areas.
On the flip side, if you have too low stocks, you can run out quicker. This can result in lost opportunities for sales and dissatisfied customers.
So, take more strict steps to optimise the inventory. For instance, use demand forecasting techniques to accurately identify inventory requirements. Install a reliable inventory management system to monitor real-time stock levels.
Eliminate overstocking troubles with a just-in-time inventory strategy. If there are existing stocks with slow movement, clear them faster on discounts.
3. Consider Acquiring a Stable Business
If the cash flow concerns don’t seem to improve anytime soon but you have enough funds, an ideal strategy is seeking a distributor for sale on a reliable platform.
Find one with stable cash flow, profitable supplier contracts, and good customer relationships. This can help you overcome the stagnant cash flow issue.
It’ll offer steady revenues without setup expenses – because operational processes are done. However, you must conduct thorough due diligence before closing the deal.
4. Streamline Accounts Receivable
One of the greatest reasons behind cash flow challenges is delayed payments from customers. So, make your accounts receivable process more efficient to get faster payments and ensure steady cash flow.
One strategy for this is offering special discounts for early payments. You can also send invoices for regular follow-up. Invest in automated invoicing and reminders to make the process hassle-free.
Establish clear credit rules and always perform credit checks whenever customers request credit extensions.
5. Optimize Accounts Payable
Be strategic while paying your suppliers as well. Don’t pay too early, or it’ll create a cash shortage on your side. Simultaneously, don’t delay it as well, or it’ll impact your connection with suppliers.
Rather, try to negotiate with suppliers about the payment terms – the longer, the better. Time your payment so that your cash outflow doesn’t leave you with an empty account.
Check if they have any discounts for early payments or bulk buying, and take advantage of those if you have enough funds. Ensure an amicable connection with suppliers as they’ll be more understanding to you then.
You can also switch to automated payment software to effectively monitor and manage all payables.
6. Seek Flexible Financing Options
If your cash flow gaps have left your resources dry, you need to seek external financing and ensure the business stays afloat.
For instance, you can consider invoice financing and factoring for immediate cash. Invoice financing services increased by 6.8% in 2020 in Australia, and more businesses are seeking them.
Another option is opening a business line of credit for short-term financial crunches. You can also seek government funding programs and grants for small businesses.
7. Increase Profitability and Cut Unnecessary Costs
Reassess all pricing strategies to boost profits. Promote high-margin products and bundle certain offerings to boost profits per sale. Don’t invest too much time or resources in low-profit margin products. They aren’t worth much, even when sold in high volumes.
Perform expense audits regularly and recognise whether you’re spending on non-essentials to eliminate/reduce them. Automate repetitive administrative duties and outsource some to reduce labour expenses.
Conclusion
Since cash flow is critical to the success of any distribution business, keep an emergency cash reserve at all times besides following these tips. Additionally, remember to maintain an emergency cash reserve to quickly address any unexpected disruptions. Start saving a portion of your profits to build this fund, and you’ll be better equipped to handle challenges as they arise.