Case Background: Dafa Trading is an important distributor under your management, having completed 49 million yuan in sales for the company last year; this year, the company requires Dafa Trading to grow by 5 million yuan, reaching 54 million. Although there is pressure, you think it can be done. At this moment, Lao Liu from Dafa Trading is anxious, saying there is no more money to purchase goods, making it difficult to complete the new sales growth. Lao Liu has been cooperative over the years and has performed well on sales targets; if it weren't for real difficulties, he wouldn't have raised it. What should you do? First, clarify what kind of problem this is. Clearly, the distributor's cash flow has issues, but distributor cooperation, market demand, and channel operations are not major problems. Therefore, you need to help Lao Liu solve the funding problem to complete 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 your Brand A. Besides Brand A, the other three companies also require increased performance targets, and his financing lines are fully used, causing Lao Liu's funding difficulties. So you decide to first analyze the funding gap for Brand A based on the current operating model, estimating a gap of about 400,000 yuan. Calculation: New sales / Existing working capital turnover = 5 million / 12.6 times = 400,000 yuan Finally, to solve where the funds come from, considering Lao Liu's current business situation, we can find solutions from the brand itself and externally: **-01- Tap Internal Potential 1. Reduce Receivables 1) Shorten payment terms. Design a promotional exchange plan: offer additional promotional activities to channels with credit terms in exchange for shorter payment terms. Based on understanding, about 36% of Brand A's sales come from large stores and hypermarkets with credit terms, both with 60-day terms. If the average payment term can be reduced by 5 days, about 250,000 yuan in cash flow can be obtained. Calculation: Monthly average sales from credit channels = 49 million / 12 months * 36% = 1.47 million Accounts receivable = Monthly average 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 free up about 240,000 yuan in working capital. Calculation: Monthly average sales from credit channels = 49 million / 12 months * 36% = 1.47 million Adjusted monthly average sales from credit channels = 49 million / 12 months * 33% = 1.35 million Adjusted accounts receivable = 1.35 million * (60 days / 30 days) = 2.70 million New cash flow = 2.94 million - 2.70 million = 240,000 yuan 2. Increase Payables 1) Provide credit lines. The company can offer credit lines to quality distributor customers, e.g., Brand A can give Lao Liu a 400,000 yuan credit line, while you supervise Lao Liu's cash flow to ensure he doesn't use the credit line for other brands. 2) Guarantee for the distributor. Leverage Brand A's influence to negotiate supply chain financial services with local banks, helping 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 conference to obtain channel prepayments. The company covers the conference costs, and Lao Liu gives up part of the profit from the new sales to the channel, in exchange for prepayments from second-tier customers, solving the funding gap. 4) Delay payment to downstream customers by one week. Assume Lao Liu pays about 500,000 yuan monthly for display fees to channels for Brand A; if payment is delayed by one week, about 20% of that, or 100,000 yuan, can be obtained as working capital. 3. Reduce Inventory From the data, it seems difficult; Lao Liu has only 7 days of inventory on average, but what if he wants to reduce further? Two methods can achieve this: 1) Increase delivery frequency from the manufacturer. 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 "water down" the order by adding volume of fast-moving products, which are sold to downstream customers at cost, picked up immediately upon arrival, but must be paid in cash. 2) Shorten delivery time. Suppose the original delivery time is 3 days; can it be shortened to 2 days or even 1 day? By shortening delivery time, the distributor's safety stock can be reduced, 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 won't discuss it here, but will write a special article on "Order Management" in the future. **-02- Obtain from Outside the Brand Lao Liu operates four major brands, so funds can be diverted 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 cannot 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 major metrics favorable to your brand, so you decide to start from these: 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 for each brand, so you can calculate the inventory return on investment (ROII) for each. 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, e.g., reduce Brand C's average inventory and invest that cash flow into Brand A. Or, not meet Brand C's annual target and invest the corresponding cash into Brand A. Calculation: Inventory Return on Investment (ROII) = Gross profit / Average inventory (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. 2) Money should be invested in brands with high return on investment. To be safe, you also obtain the operating profit margins for the four brands from Lao Liu (Table 2). Using the quick ROI calculation, you know that Brand B has the lowest ROI, so you can suggest Lao Liu transfer some funds from Brand C to Brand A. To prevent the distributor from investing surplus funds 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 formula:
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 both ROII and ROI are favorable to your brand, you don't need to tell Lao Liu both. You can choose the most favorable metric to present, keeping the rest as backup. As for unfavorable metrics, such as gross margin and operating profit margin, you should avoid mentioning them or gloss over them. After these efforts, Lao Liu's funding problem should be solved. At the same time, you might also consider: what if the distributor can't find money at all, or has money but is unwilling to invest in you? We'll discuss that later. Source: 为之 (ID: gh_98f8e108c99d)