In July, I was invited by several companies to participate in their semi-annual meetings and conduct training sessions. After the meetings, some distributors told me that business is tough this year, with unstable and fragile cash flow being the biggest challenge. Brand owners demand payment before delivery, and to meet targets, capital investment keeps increasing; retailers demand delivery before payment, and credit periods are getting longer. Distributors are caught in the middle, and often they truly have no money to continue. What should they do? Today, I will provide several solutions on this topic.
Some Basic Facts to Be Clear About
I always ask distributors to deeply consider three facts: For the same 1 million yuan in sales, some earn 30,000 yuan, others earn 50,000 yuan; for the same 1 million yuan in sales, some have expenses of 100,000 yuan, others 150,000 yuan; for the same 1 million yuan in sales, some need 200,000 yuan in capital, others 500,000 yuan. What causes these differences?
1. Before the pandemic, the FMCG business was already becoming difficult, which is a consensus. In terms of market capacity, most categories have transitioned from an incremental era to a stock era and then to a shrinking era. In terms of consumption, consumption downgrading is becoming more evident, and weak consumption is spreading. These are unfavorable factors and a reality that manufacturers and distributors must face. If expanding, one must be able to advance and retreat, avoiding rashness; if being conservative, one must improve efficiency, protect profits, and avoid confusion.
2. The net profit of an FMCG distributor is generally 3%-5% of annual sales (though it may vary slightly by category). Distributors with strong operational capabilities improve their overall gross profit through product mix adjustment, channel structure adjustment, and operational efficiency improvement, while those with weak capabilities may only achieve 1%-2% of annual sales. This is a reference standard to help distributors assess their profitability.
3. The capital turnover of an FMCG distributor can be 4-8 times per year. For example, if a distributor has annual sales of 12 million yuan and turns over capital 4 times, they need 3 million yuan; if 8 times, they need 1.5 million yuan. Distributors with strong operational capabilities improve capital turnover through inventory management, efficiency of expense reimbursement, and accounts receivable management, while weak ones may only achieve 2-3 times. Capital cost is an invisible cost that cannot be ignored; even if using one's own money, one must consider that this money could generate value elsewhere.
The above three points are closely related to a distributor's wallet and are basic knowledge that should be used to measure one's operational capability.
Many Distributors Are in a State of 'Faking It'
What is the 'faking it' state? My understanding is that when a distributor complains about being poor, they should first examine whether their management and capital efficiency are optimal. In simple terms, can they alleviate the situation by adjusting inventory capital occupation? Can they improve reimbursement efficiency to reduce brand owner advance expenses? Can they manage accounts receivable? Can they compress various operating costs? If all these are done to the extreme and capital is still insufficient, then they are 'really broke'.
I. Alleviate by Adjusting Inventory Capital Occupation
First, I want to clarify that if a brand owner forces stock, the distributor needs both emotional intelligence and intelligence. In my field visits, I found that different distributors cooperating with the same brand owner have different 'safety stock' levels, some 1.5 times, some 5 times, indicating there is room for negotiation. For non-forced stock, I suggest:
1. Optimize inventory management: Distributors need to accurately forecast market demand and calculate a reasonable inventory level (i.e., neither excess causing capital tie-up nor shortage affecting sales). This is the baseline. Even if forced to stock, it should be reasonable and controllable based on this baseline. At the same time, reasonably and maximally push stock to downstream channels to ensure smooth cash flow.
2. Implement tiered inventory management: Based on sales speed and demand, classify inventory into fast-moving, medium-moving, and slow-moving, and allocate capital and management differently. Timely clear slow-moving or out-of-season inventory through discounts, flash sales, etc., to quickly recover capital. This requires deep thought; many products sold at a big discount are more profitable than selling at full price a year later.
3. Information management: Use financial software or inventory management software to monitor inventory and sales, respond to market changes promptly, and adjust inventory strategies quickly. Without digital warehousing, FMCG is hard to do now.
II. Alleviate by Improving Reimbursement Efficiency to Reduce Brand Owner Advance Expenses
Here is a real example: A brand owner's reimbursement requirements require three photos on the visit system: a storefront photo, a display photo, and a prize redemption photo, all submitted by the 5th of the next month. Some distributors complained that the brand owner often withholds their expenses. After investigation, I found that their team often missed photos. Even if they completed the indicators by the end of the month, they couldn't finish by the 5th, so the manufacturer had to delay reimbursement. My answer: If a phenomenon happens once, it may be accidental; if it keeps happening, it's the boss's problem, and you need a system to constrain such events. Three suggestions:
At the beginning of each month, study the brand owner's expense policy together, and only go to the market after passing the exam;
Establish an incentive system for non-reimbursement or delayed reimbursement caused by sales staff's subjective factors;
Since frontline staff have many tasks, arrange a clerk to regularly check and provide supervision and reminders.
Once the system is in place and printed on the wall, the next month will improve significantly. Advance expenses are brand owner support for the market. Distributors should not treat reimbursement as a burden; understanding the rules and reimbursing on time is the greatest contribution to their cash flow.
III. Alleviate by Managing Accounts Receivable
First, note that the circulation channel differs from the modern channel. The modern channel has explicit regulations, and accounts receivable are unavoidable, but managing receivables in the circulation channel has some techniques. The main issue is the sales team's mindset, and because they didn't pay attention before, store owners got used to it.
My suggestion is to classify customers into four types based on financial strength and repayment willingness:
1. Strong financial strength + strong repayment willingness: Sales staff should settle normally, and no precedent of accounts receivable is allowed under any circumstances. Once the door is opened, there will be endless trouble.
2. Strong financial strength + weak repayment willingness: Increase collection frequency. Sales staff and supervisors should take turns to collect frequently, going every few days, collecting a little each time, even if it's like squeezing toothpaste. Develop the habit of cash-on-delivery, but maintain a good attitude and be prepared for a long-term, high-frequency battle.
3. Weak financial strength + strong repayment willingness: These customers truly have no money. Of course, understand their supply channels; they may be special channels or government procurement with slow payment. Assess their value.
First, control the supply volume. If their credit is good, just ensure no stockouts; do not push stock. Second, do not issue expense support; instead, offset it against goods or issue it in a lump sum after settlement. Finally, if the customer has many product categories, you can set different expense support for cash-on-delivery and accounts receivable, which can attract the customer's limited funds to your products.
4. Weak financial strength + weak repayment willingness: These customers are generally of little value. The worst outcome in communication is 'pay for the previous shipment before the next delivery', meaning no two shipments should be unpaid. If they are habitual defaulters, take necessary measures, such as reporting to the police or suing to protect your rights.
For this customer classification, sales staff and supervisors should use various connections to understand the customer's operations and make accurate and objective judgments about their willingness and financial status.
Once the classification is formed, implement the corresponding strategies unwaveringly. Sales may decline during the process, but it is temporary; do not give up halfway.
IV. Alleviate by Compressing Various Operating Costs
There are many operating costs involved. Common expense categories can be seen in the figure below (not shown here). I will focus on the organizational configuration dimension. For distributors, personnel costs are one of the biggest pain points for cash flow. First, emphasize: The distributor's organizational structure cannot be set up from a single dimension. This is why many distributor bosses cannot implement what they learn after training. You cannot understand the whole from a single part; you must implement every practical project. Based on my visits, I offer the following dimensions:
1. Business scale dimension: Business scale determines the number of staff. Distributors need to control per capita contribution. For general FMCG, annual sales of 1.5-2 million yuan can support one market staff member. Based on this standard, distributors can calculate a reasonable number of employees. For example: 10 million yuan scale should be controlled within 6 people; 20 million yuan within 13 people; 30 million yuan within 20 people. As the business scale grows, the team will grow, and you can appropriately add management personnel. The ratio of management to frontline is generally 1:(6-9). Consider that if the gross profit of products is high, management can be fully non-operational (pure management, ratio 1:9); if gross profit is low, management can also serve as sales staff (management + area visits, ratio 1:6).
2. Market service dimension: The number of outlets and visit frequency are determining factors. Service coverage first requires outlet calculation. Based on their current situation, companies calculate the average outlet demand to achieve sales, then establish the relationship between population and outlets based on per capita annual consumption, and finally make staffing calculations. For example: A region has a population of 1 million, with an outlet density of 1,000 people per outlet, resulting in 1,000 outlets. If one person can visit a maximum of 150 outlets based on frequency needs, then 1,000/150 = 6-7 staff are needed. It must be emphasized that different regions have different outlet coverage requirements, visit frequencies, and service outlet numbers per person, so conclusions must be drawn after research, not by guesswork.
Many Distributors Are in a State of 'Really Broke'
If improving management efficiency still cannot meet operational cash flow needs, what should be done? Here are some suggestions:
First, consider external financing. There are two common ways:
1. Bank loans: Apply for short-term or long-term loans to meet urgent capital needs. Consider the profit structure of the products you distribute. If some products' profits are lower than bank interest, consider giving them up decisively or using short-term borrowing at key nodes.
2. Equity financing: Attract investors, mainly considering developing your employees as partners, and secondly attracting downstream suppliers to participate in the business. The distributor partnership model in China's FMCG industry has been around for a long time; you can learn from each other.
Second, adjust the business model. There are two common ways:
1. Transform sales model: Consider online sales or other new sales channels to reduce dependence on traditional models and revitalize cash flow.
2. Cut your coat according to your cloth: I have seen many distributors fail due to rash expansion. If you really have no money, consider taking on fewer brands and reasonably compressing the business scale.
Regarding distributor operation and management, at the 2024 6th China FMCG Conference & 3rd China FMCG Distributor Conference & 3rd China FMCG Hard Discount Conference to be held from August 20-22, 2024, New Distribution has invited more than ten regional FMCG distributor benchmarks to deeply share their practical experience and thinking.
At the conference, the following reports will be released: "Guidance Report on B2b Platformization Strategy for FMCG Distributors", "2024 Survey Report on FMCG Distributor Operating Conditions", "Practical Implementation Guidance Report on O2O in FMCG Regions", and "2024 China Hard Discount Development - FMCG Industry Insight Report".
Interested friends are welcome to scan the QR code to inquire about the conference details!