This is the first installment of our informational three-part series - the ultimate guide to help you lay a solid foundation in cash flow management for your wholesale business. In this article, we will be exploring the pain points in cash flow management and how to solve them.
What is cash flow?
Cash flow is the amount of cash and other cash equivalents moving in and out of your company from one period to another.
Whether you’re a small wholesaler, manufacturer, or a well-established brand, cash flow is an indication of your business’s overall financial health. It is also essential for measuring your liquidity.
A positive cash flow means your business has more cash than the expenses it incurs. This provides your business with greater stability, flexibility, and buying power. It also prevents you from defaulting on any loans you have and stops your business from closing down. Meanwhile, a negative cash flow means your expenses exceed your cash.
Maintaining a positive cash flow is crucial to a company's success, but many wholesalers and manufacturers still face cash flow challenges. Here are six of the most common.
1. Bad Debts and Uncollectible Accounts
Late payments are one of the most commonly faced problems among many businesses.
According to a study done by Euler Hermes in June 2015, B2B companies reported the highest days sales outstanding (DSO) figures (i.e., average number of days it takes a company to collect payment after sale has been made) across all industries surveyed. The September 2017 Atradius Payment Practices Barometer found that 48.8% of B2B invoices were overdue in the United States.
This astonishing figure is nearly half of all B2B invoices. The top two reasons for delayed payment were insufficient cash flow on the client’s end (41.8%) and clients’ intentional use of outstanding invoices as a form of financing (28.2%).
However, whatever the reason, the fact is that no payments from clients means no money coming in, which is dangerous for a business’s cash flow in the long run if left unchecked.
When clients don’t pay you on time or don’t pay you at all, you lose out on profit and hence, cash. Without sufficient cash on hand, you won’t be able to pay your suppliers, pay warehousing and maintenance costs, or give out salaries to your employees.
You need to enforce strict payment policies with your clients and have penalties when payments are past due. With a growing number of clients, it is also beneficial to have a system in place to track your collections.
One way to keep track of your receivables is by using an inventory management and accounting software. It can help you automate your collection processes, making it easier for you to collect overdue accounts. With an inventory management software, you can:
- Create invoices from orders automatically
- Implement credit limits
- Issue credit memos
- Send invoices to customers through email and remind them when payment is due
- Set up alerts that notify you when a customer has not yet paid their invoice
Another tactic is to incentivize your customers to make early payments by offering small discounts (5% or less).
2. High Overhead Expenses
Overhead expenses are any business costs not directly related to selling your product or service. For wholesalers, high overhead expenses can be attributed to:
- Rental for your warehouse spaces
- Maintenance costs for equipment such as delivery trucks, forklifts, conveyor belts
- Salaries for your warehouse workers
High overhead is a common cash flow issue faced by organizations of all sizes, from family businesses to Fortune 500 companies. It is also problematic because overhead expenses are a constant reality of business ownership.
It’s impossible to to cut all your overhead completely; the solution: expense management. This is the process by which you monitor, audit, and control your overhead expenses so that they don’t get out of hand.
Audit your overhead expenses on a regular basis and see which ones are hurting your cash flow the most. If the rent for your warehouse is too expensive, consider renting a smaller and more affordable one. Maybe you have more delivery trucks than you need. You can sell one or two of them depending on your situation. These actions are necessary if you want to improve your cash flow.
3. Overestimating Sales Projections
Optimism is a quality shared by all business owners. It’s perfectly understandable that you want your business to succeed and be profitable. After all, no entrepreneur operates a business with the thought of losing money.
However, letting your optimism compromise your objectivity, and overestimating your sales projections without looking at historical evidence and real numbers is a surefire way to damage your cash flow.
For example, you are a wholesaler who distributes coffee beans to nearby coffee shops and restaurants. Winter is around the corner, so you order twice the amount of product from your suppliers, thinking that your sales will double because people will want to drink more coffee due to the cold weather. Winter comes, and while your sales do increase, they didn’t double like you projected. You spent a considerable amount of money on your product orders, but you weren’t able to recover those expenses because your sales didn’t double. This leads to negative cash flow.
That being said, it’s essential that you remain realistic and objective when setting goals like sales. Be realistic about what you can achieve.
One thing you can do is perform quantitative analysis and forecasting. Here’s what you need to do.
Use historical data
Track sales trends and make realistic sales projections by analyzing your most recent historical sales data. Use data from one or two years ago. From that data, you can determine which specific months you get low sales or high sales. You can then make a realistic, educated guess as to your sales projections for the next six months or so.
Make use of sales reporting tools
An automated sales reporting tool can help you analyze your sales and revenue history and turn it into valuable insight. A sales reporting tool provides you with reports that help you identify your top-performing products (in terms of revenue) as well as your most profitable customers.
With this insight, you can make informed business decisions. You’ll know which products to focus your sales efforts on. You’ll also know which customers to take care of, improving their experience so that they keep buying from you.
4. Low Profit Margins
This is a dilemma that generally plagues small business wholesalers who are just starting out. In the initial stages of their business, wholesalers obviously need customers. To build their client base and attract more customers, these businesses often sell their products at overly low prices.
Startup wholesalers who set their prices too low don’t gain sufficient profits. They set themselves up not only for negative cash flow, but for business failure as well. They don’t have enough profits, so they aren’t able to recoup their initial investments. In addition, due to the negative cash flow, these startups are unable to cover their operating costs.
Audit each and every one of your products or services and calculate all the costs involved in selling them. If you are selling high-cost products at low prices, consider raising their prices so that you earn enough revenue to cover costs.
If you are selling a product at $22 and it costs you $20, that gives you a low profit margin of 10% ($2 profit/$20 revenue). In this case, you may need to raise the product’s price to $28. This would results in a gross margin of 40%, which, after overhead is factored in, may get you closer to the 20% benchmark for profit margin for wholesalers.
If you don’t think raising your prices is feasible, then you can lower expenses related to that product. You can try to find a cheaper supplier, and you can also minimize any advertising cost or marketing costs related to that product.
5. Excess Inventory
According to a report by Wasp Barcode, 46% of small businesses (SMBs) either don't track inventory or use a manual method. The lack of an inventory management system can lead to excess inventory, which greatly affects the cash flow of of SMBs.
This is because an overabundance of inventory ties up working capital. Products which sit in a warehouse are not getting sold, which means no money is coming in. Furthermore, it is more difficult for small businesses to get cash compared to large multinational corporations. Banks are more likely to approve business loans of large corporations compared to small businesses because of their higher credibility.
Always remember the 80/20 rule: 80% of your sales should come from only 20% of inventory. Determine your best-selling products and always make sure that you have an ample supply of them. It is more beneficial for your wholesale business to keep the best-selling 20% in stock because that is where 80% of your sales will come from.
The best way you can stick to this rule is by optimizing your inventory through the utilization of inventory management software. With this tool, inventory control is much simpler because the process is automated. You can easily track inventory levels and know whether you have too much of a specific item.
If you are holding on to an excess of certain products, consider bundling together complementary products (coffee and sugar) and then offering them at a cheaper price than if they were sold individually.
You have product A which costs $10 per unit. It complements product B which costs $15 per unit. Sell them as a bundle with a price of $20 instead of $25 if they were sold individually.
6. Overspending and impulse spending
Plenty of entrepreneurs spend too much money in the course of starting up their business, especially first timer wholesale distributors. They often invest in items such as expensive, top-of-the-line machinery like forklifts even when their business do not actually need one to successfully operate. They could perform business operations as efficiently with a second-hand machine, and it would be much cheaper too.
Starting a business does entail spending a significant amount of money. There’s no question about that. However, your expenses should only go to things that can help your business profitability in measurable ways.
Do a cost-benefit analysis of every single business expenditure and always consider your bottomline before making a purchase. Keep in mind that each dollar that you spend is a dollar taken out of your cash flow.
It’s also important that you set a realistic budget and stick to that budget, especially during your startup phase. Since your business is still in its initial stages, you are not profiting yet, so avoid going over your projected budget.
Prioritize expenses that help drive your revenue and eliminate non-essential expenditures. If your profit is reliant on the speedy delivery of perishable goods, then vehicle maintenance should be at the top of your list.
Want to know how to improve cash flow and avoid future cash flow problems? Sweet’s inventory management software is what you need. It can help you in dealing with your cash flow problems by providing you with real-time stock visibility, so it’s easier for you to determine if you have excess inventory.
Our technology is also integrated with accounting software such as QuickBooks and payment software like Shopify and Stripe. Take advantage of these integrations to automate your invoicing and collection processes, making collecting from your clients a breeze.
To find out how Sweet can help you, request a free demo today.