Case Background Dafa Trading is an important distributor under your management. Last year, it achieved 49 million yuan in sales for the company; this year, the company requires Dafa Trading to grow by 5 million yuan, reaching 54 million. Although there is pressure, you believe it can be done. At this moment, Lao Liu from Dafa Trading is anxious, saying he doesn't have more money to purchase stock, making it difficult to achieve the new sales increase. Lao Liu has been cooperative over the years and has performed well on sales tasks. If it weren't for genuine difficulties, he wouldn't have raised the issue. What should you do?

First, you need to clarify what kind of problem this is. Clearly, the distributor has a cash flow issue, while distributor cooperation, market demand, and channel operations are not major problems. Therefore, you need to find ways to help Lao Liu solve the funding problem to achieve the sales target.

Second, you need to know the size of the distributor's funding gap. So you start studying Lao Liu's business and obtain the following information (Table 1):

(Table 1) Lao Liu currently represents mainly four brands, including Brand A, which you are responsible for. Besides Brand A, the other three companies also require increased performance targets, and his credit lines are fully used up, causing Lao Liu's funding difficulties. So you decide to first sort out the funding gap for Brand A based on the current operating model. The estimated gap is about 400,000 yuan.

Calculation: New sales increase / Existing working capital turnover = 5 million / 12.6 times = 400,000 yuan

Finally, to solve the problem of where the funds come from, considering Lao Liu's current business situation, we can find solutions from both the brand itself and external sources:

1. Tap Internal Potential ■ Reduce Receivables 1. Shorten payment terms; Design a promotional exchange plan: offer additional promotional activities to channels with payment terms in exchange for shortened payment periods. According to understanding, about 36% of Brand A's sales come from large stores and hypermarkets with payment terms, both with 60-day terms. If the average payment period can be reduced by 5 days, about 250,000 yuan in cash flow can be generated.

Calculation: Average monthly sales from credit channels = 49 million / 12 months * 36% = 1.47 million Accounts receivable amount = Average monthly sales from credit channels * (Collection days / 30 days) = 1.47 million * (55 days / 30 days) = 2.69 million New cash flow = Original accounts receivable - Adjusted accounts receivable = 2.94 million - 2.69 million = 250,000 yuan

2. Change channel structure; Increase sales from channels with no or shorter payment terms to compress channel receivables; assuming total sales remain unchanged, reducing the sales share of large stores and hypermarkets from 36% to 33% can generate about 240,000 yuan in working capital.

Calculation: Average monthly sales from credit channels = 49 million / 12 months * 36% = 1.47 million Adjusted average monthly sales from credit channels = 49 million / 12 months * 33% = 1.35 million Adjusted accounts receivable amount = 1.35 million * (60 days / 30 days) = 2.7 million New cash flow = 2.94 million - 2.7 million = 240,000 yuan

■ Increase Payables

  1. Provide credit lines; The company can offer credit lines to high-quality distributor customers. For example, Brand A can give Lao Liu a credit line of 400,000 yuan. At the same time, you supervise Lao Liu's cash flow to ensure he doesn't use the credit line for other brands.
  2. Guarantee for the distributor; Leveraging Brand A's influence, negotiate supply chain financial services with local banks to help the distributor obtain low-interest bank loans. By aligning the flow of goods, data, and cash between both parties, ensure the distributor uses the funds exclusively for the intended purpose, with high security.
  3. Hold a second-tier ordering meeting to obtain channel prepayments; The company bears the meeting costs, and Lao Liu gives up part of the profit from the new sales increase to the channel in exchange for prepayments from second-tier customers, solving the funding gap.
  4. Delay payment to downstream customers by one week; Assuming Lao Liu pays about 500,000 yuan monthly for display fees to channels for Brand A, delaying payment by one week can free up about 20% of that, approximately 100,000 yuan in working capital.

■ Reduce Inventory From the data, this is difficult because Lao Liu only has an average of 7 days of inventory. But if you still want to reduce it, you can achieve it through two methods: 1. Increase the frequency of factory deliveries; Change from ordering twice a week to three times a week. Although the total order amount remains the same, the distributor's average inventory days will decrease, reducing the capital tied up in inventory and increasing working capital. Note: Increasing delivery frequency may cause individual orders to fall below the minimum order quantity. What to do? You can "pad" the order by adding more high-volume products, which are sold to downstream customers at parity price and picked up immediately upon arrival, but must be paid in cash. 2. Shorten delivery time; If the original delivery time is 3 days, can it be shortened to 2 days or even 1 day? By shortening delivery time, you can reduce the distributor's safety stock, thereby lowering overall inventory days and increasing some working capital. Note: You might wonder why increasing delivery frequency and shortening delivery time can reduce average inventory. This involves order management knowledge, which would be another article. We'll skip it here and write a dedicated article on "Order Management" in the future.

2. Obtain from Outside the Brand Lao Liu operates four major brands, so you can also shift money from other brands, but you need to explain to the distributor where it's more worthwhile to invest, depending on which metric is more favorable to you. From the earlier data, you can't compare gross margin or operating profit margin with other brands because, as you know, Brand A's profit margins are not high (Table 2). So it's best to compare other metrics.

(Table 2) After calculation, you find two metrics that are very favorable to your brand, so you decide to start from there:

  1. Money should be invested in brands with high inventory return on investment; From Table 1, you can know the inventory levels and gross profit amounts of each brand, so you can calculate each brand's inventory return on investment. From the results, Brand A has the highest ROII at 3.4, while Brand C has the lowest. You can suggest Lao Liu transfer some funds from Brand C to Brand A, for example, by reducing Brand C's average inventory and investing that cash flow into Brand A. Or, not achieve Brand C's annual target and invest the corresponding cash into Brand A.

Calculation: Inventory Return on Investment (ROII) = Gross profit / Average inventory amount (ROII reflects the return per unit of inventory cost, i.e., how much profit each yuan of inventory investment brings.) Brand A ROII = 3,190,880 / 939,726 = 3.4. Substitute the corresponding data for other brands to get the ROII data in Table 2.

  1. Money should be invested in brands with high return on investment; To be safe, you also obtain the operating profit margins of the four brands from Lao Liu (Table 2). Using the quick ROI calculation, you know that Brand B has the lowest ROI. You can suggest Lao Liu transfer some funds from Brand C to Brand A. To prevent the distributor from investing surplus money in liquor, you can explain that although Brand D has a high ROI, its capital turnover is slow, with high inventory days and accounts receivable days, making it slow to liquidate and thus risky. In contrast, Brand A has the highest capital turnover, quick cash recovery, and is safer.

Calculation: Return on Investment (ROI) = Operating profit margin * Working capital turnover Brand A ROI = 2.5% * 12.6 = 31.5%. Substitute the corresponding data for other brands to get the ROI data in Table 2.

Note: Derivation of the quick ROI calculation: 1 ROI = Operating profit / Working capital 2 Operating profit = Operating profit margin * Sales 3 Working capital = Sales / Working capital turnover (capital turnover rate) Substitute 2 and 3 into 1 to get: 4 ROI = (Operating profit margin * Sales) / (Sales / Working capital turnover) = Operating profit margin * Working capital turnover

Although you know that both ROII and ROI are favorable to your brand, you don't need to explain both to Lao Liu. You can choose the most favorable metric to present, keeping the other as a backup. For unfavorable metrics, such as gross margin and operating profit margin, you should either not mention them or gloss over them.

After these efforts, Lao Liu's funding problem should be resolved. At the same time, you can also think about what to do if the distributor can't find money at all, or if he has money but is unwilling to invest it in your brand. We'll discuss that in the future.

Source: 为之 -END-