We often hear distributors complain: insufficient funds! Because of insufficient funds, their business cannot expand further; because of insufficient funds, they earn less money each year; because of insufficient funds, they may even fail to meet the manufacturer's annual targets at year-end...

In reality, we also often see distributors scrambling to raise funds, borrowing from everywhere, especially as the year-end approaches and goods are in high demand. Many distributors even resort to high-interest loans to get by. Why does this happen? How can distributors end this constant "food shortage"?

Investigation shows that the causes of cash flow stagnation can be divided into external and internal factors.

-01- External Factors

1. Retailers' occupation of distributor funds

With the development of new retail formats, especially the rapid rise of chain retail enterprises, these terminal retail enterprises have gained increasing dominance in the commodity circulation chain, firmly controlling suppliers.

Foreign retail giants like Carrefour and Walmart are increasing their stores in China, while local retail giants are also expanding aggressively, such as Shanghai's Nonggongshang and Lianhua, and Wuhan's Zhongshang Group and Zhongbei Group.

Even in second-tier cities, there are leading chain commercial enterprises, all rapidly expanding. Where does the expansion capital come from? Largely by occupying suppliers' funds.

Retailers typically occupy funds through: long payment terms (Carrefour generally has 60 or even 90 days), sponsorship fees for new store openings, delayed normal settlement for new stores, entry fees for new stores, initial stocking for new stores (Walmart's first order is free), etc.

Retailers keep opening new stores; if you want to do business with them, you must continuously "support" them. If you don't, there are plenty of other suppliers waiting to "support" them. So, to maintain market share, you have to keep "supporting" retailers.

Some retail enterprises simply mandate that if you do business with them, you must support their new store openings. These "supports" essentially mean paying fees and having payments delayed, with cash flowing into retailers' hands.

The more stores a retailer has, the greater the capital pressure on distributors. During this period of retail expansion, suppliers' funds are unceremoniously occupied by retail enterprises, and distributors' cash inflows dwindle.

On the other hand, with the increase in retail outlets, per-store sales performance is declining, and the return on capital is also decreasing. Capital is tied up, but profits are thin; without strong financial strength, it's hard to do business well.

2. Manufacturers' preemption of distributor funds

We often hear distributors say: "In the past, just open a storefront, and manufacturers would give you goods for free, pay after selling, no capital tied up, and high profits." Now, the lack of commercial credit means companies no longer easily sell on credit, even small players in the industry typically require cash on delivery, preferring to give discounts rather than sell on credit. Distributors must pay cash to stock up.

Some well-known large enterprises, although they provide credit lines, generally have purchase tasks far exceeding actual market absorption capacity, and are very strict about funds, requiring payment by the credit period regardless of whether inventory is sold.

Payment is made, but a large amount of goods remains piled in the distributor's warehouse. To obtain rebates and support, distributors must complete monthly purchase tasks. Thus, inventory keeps rising, cash keeps decreasing, and cash turns into goods.

Well-known brands generally operate this way. Some strong brands not only don't offer credit terms but also require a minimum order amount. In this way, different manufacturers, to suppress competitors, try every means to seize distributors' cash and warehouse space, turning distributors' cash into warehouse stock.

In simple terms, distributors must pay cash for goods, while in the sales process, terminal retailers squeeze fees and delay payments, occupying as much capital as possible. This reduces distributors' cash inflows.

From the enterprise's own actual situation, there are often problems such as excessive inventory, accumulation of slow-moving products, long capital recovery cycles, and even bad debts. These can be gradually improved during operations.

But neglecting cash management and overloading the enterprise are fatal, often trapping the enterprise in a vicious cycle, unable to escape cash shortages for a long time, and even destroying the business. Many distributors precisely overlook cash flow analysis.

3. Capital occupation by distributing other products

Every distributor doesn't want to let their funds idle; they hope to use them to create more profit. Therefore, when funds are idle during the off-season, they think about using them to take on a new product to generate more profit.

Especially when entering the peak season, funds can be diverted and occupied due to distributing other products, making it difficult to stock up for the peak season.

-02- Internal Factors

1. Too many product categories

This situation is the most common and least noticed by distributors themselves. For a distributor, every product they handle must be profitable; otherwise, they wouldn't distribute it. The idea is correct, but the practice is very unadvisable.

Take a county-level distributor as an example: He started with 100,000 yuan in working capital. Because the brands he operated had fast turnover and occupied little capital, even with 100,000 yuan rolling capital, he didn't feel cash-strapped. Because funds were loose, he thought he couldn't let money sit idle. Six months later, he took on a beer brand.

Beer requires hotel sales, especially his relatively mid-to-high-end beer brand. This suddenly made funds tight, but because our brand occupied little capital and goods turned over quickly, profits were visible monthly. After a few tough months, he recovered and immediately took on a peanut milk brand from Hubei.

Later, he added an apple cider vinegar brand, a instant noodle brand, and a baijiu brand. The more he did, the more strained he felt, and the less money he had to pay for goods. Eventually, he couldn't even raise enough to pay for our fast-moving, quick-turnover products.

Why? Because the funds were tied up in the inventory of these brands and hotel receivables.

Were these brands profitable? Certainly! As long as goods are sold, they bring money. But the turnover speed of goods is always limited. Even if goods are profitable, how much can they earn without turnover?

The market is not like the planned economy era where goods could be sold without unloading from the truck. Now, you need to spend money, distribute goods, and operate the market yourself.

He pinned his hopes on the beautiful vision of selling goods, ignoring the basic concept of turnover speed and the fundamental risks of market operations. This is a utopian idea.

2. Greedy for promotional policies

When promotions are announced, many distributors can't wait to borrow money to bring back goods with promotional policies, especially for popular brands.

There is a limit to everything; you must learn to stop in moderation. Manufacturers naturally want more payments, but truly market-oriented manufacturers also understand the limits of promotions. If you stock up so much that it takes three to four months to sell, and you don't order a second batch, the manufacturer's sales staff and executives will mark your market as unhealthy, and future support will decrease.

Moreover, those promotional goods sitting in your warehouse for three to four months not only tie up capital but also the interest on borrowed funds offsets your profits. You still don't make money!

Of course, for those unscrupulous brands with ulterior motives, they never intended to stay in your market long-term. If you stock up for two years, they'll applaud, but if you need returns, exchanges, or solutions for slow sales, you'll never find them again.

3. Liking to sell on credit

Selling on credit to hotels is sometimes unavoidable. But hotel credit sales require skill; it's not an endless bottomless pit. Distributors with some market influence are often among the biggest creditors in their markets. Supermarket payment delays and hotel payment delays are common; credit sales to key accounts in distribution channels are normal; credit sales to government units are unavoidable; there are a thousand reasons for credit sales.

From the distributor's heart, besides market needs, the private thought that credit sales can make money is also deep inside. Isn't it said that distributors are profit-seeking? As long as they see money to be made, they often involuntarily fall in, until they realize it's a trap and it's too late to withdraw.

High-profit credit sales often come with high risks! If distributors underestimate this and fall into the credit trap, how can funds not be tight?

4. Overestimating oneself

Do things according to your ability. But some distributors often bite off more than they can chew, leading to cash flow problems.

A distributor who was an agent for a dry red wine brand initially did well because he knew the market. Within two years, the brand became the top red wine brand in his area, and he made some money.

The manufacturer, seeing his market capability, gave him the supply rights for all supermarkets (mainly chain or local large supermarkets) in the entire province.

He thought it was a "golden opportunity," but within a year, he faced severe cash flow shortages. The capital occupied by supermarkets (especially during the Spring Festival peak) far exceeded his capacity, and he had to terminate the provincial supermarket supply agreement and retreat to his local market.

Distributors must estimate their limits. Some small distributors also fall into this trap, with limited funds but insisting on directly supplying all supermarkets in their area, covering the entire network, not focusing on their strengths, and not understanding the importance of the "food chain."

Now that we've identified the causes of distributors' capital shortages, we can find solutions. Here are the "prescriptions":

(1) Focus on product categories

"A mountain doesn't need to be high; it's spiritual if there's a fairy." Goods don't need to be many; it's enough if they make money. Distributors must resist temptation, especially those who have made money with a brand. Although there are many profitable brands on the market, not every business can be done by you. Trying to catch everything in one net results in catching nothing and getting entangled yourself.

Generally, when choosing new products, distributors should focus on similar or related channel products, avoiding brands with similar positioning or direct competition. Unless you're particularly wealthy, it's best not to distribute more than 3 brands.

Here, we remind distributors that under each brand, it's also best not to distribute more than three product variants, unless they are replacements. Nowadays, manufacturers often develop brands with a series of products, which seems to trap distributors' funds. If distributors think they must distribute all products under a brand, they'll inevitably fall into capital shortage.

80% of sales come from 20% of products; this is the golden rule.

(2) Avoid excessive "greed"

Distributors who are greedy for promotional policies often don't calculate carefully and don't understand the basic business principle of "goods turning like a wheel." Based on our usual experience, no matter how strong the promotion, your stockpiling should not exceed 1.5 times normal sales, and at most 2 times.

You must understand that with strong promotions, you want to stock up more, but other distributors also want to stock up. What's the result of everyone overstocking? Price cuts! Once prices are cut, your hope of making money from overstocking vanishes, and you're stuck with capital tied up.

(3) Plan ahead, prepare goods plans early, and seize distributor funds first.

"Forewarned is forearmed; without preparation, you'll fail." Only by considering things in advance can you stay calm in crisis. Last-minute efforts are useless and let opportunities slip away. Therefore, as frontline sales personnel, when managing distributors daily, you should do two things:

First, pay attention to distributors' capital issues, understand their cash flow status and when funds will be recovered.

Understand how long distributor funds are occupied in each channel and the payment terms for goods. Understand the movement of distributor inventory and stock levels. Understand the distributor's actual financial capacity. Be well-informed, promptly remind and solve problems, avoid inventory occupying funds, and use knowledge of fund availability to prevent other products from occupying funds.

Second, track market or industry sales dynamics, understand market conditions, accurately predict peak season sales, and present a convincing distribution plan and market operation plan to distributors. This tests the basic skills of sales personnel.

By coordinating with distributors in advance, developing and implementing shipping plans, you can preempt distributor funds for early stocking.

When I was handling external market business for a dairy company, for the Spring Festival peak season, to help cash-strapped distributors stock up, I started three months before the peak to remind them of the quantities needed, arranged fund usage plans based on their payment collections, and made it impossible for them to avoid the capital issue.

I also cited examples of distributors who had stocked up early the previous year, avoided supply shortages during the Spring Festival, and made big profits. I repeatedly reinforced their memory, sparked their interest, and detailed sales plans and contingency plans. Through this series of work, funds arrived on time, and stocking proceeded smoothly.

(4) Develop a payment collection plan and align it with the goods plan

Mainly by adjusting the method of large-batch purchases, based on the distributor's fund availability or the settlement times of large stores and medium supermarkets, arrange payment times, develop stocking plans, and change the past problem of one-time large capital occupation. By splitting into smaller batches, solve the distributor's capital and peak season stocking issues.

(5) Establish a credit management system and set credit limits

Consider market characteristics, market capacity, product features, and competition comprehensively. Also evaluate distributors on various aspects: scale, financial status, character, personality, work style, cooperation time with the company, payment punctuality, and reputation in the industry.

Develop a credit management system for distributors, granting appropriate credit limits to alleviate capital pressure during peak season stocking. Generally, companies can set credit limits based on annual/monthly sales or a ratio of monthly payments to ease peak season stocking funds.

(6) Use physical collateral to guarantee payments

This involves using distributors' fixed assets such as houses or vehicles as collateral to guarantee payments, solving the problem of insufficient funds during peak season and ensuring market stocking.

(7) Sign targeted credit sales with terminals.

Given that large stores and medium supermarkets occupy significant distributor funds, change the supply agreement for these channels to be directly with the company, operating independently for these channels, to solve distributor capital issues during peak season stocking.

For example: Mr. Wang, the regional manager of L Company, learned that in the C market of K region, before the peak season, the distributor's limited financial strength prevented him from stocking up as required. Through the local city manager, he discovered that two supermarkets were occupying the distributor's funds, causing the stocking problem.

After investigating the market, he found that the two supermarkets were very strong in the region, and payment security was guaranteed. To solve the distributor's capital occupation during peak season stocking, Mr. Wang adopted the following methods:

A. Change the supply agreements for the two supermarkets to be signed directly with the company, with the supermarkets managed by the company. The agreements require that the distributor's early and late payments must go to the company's designated account.

B. The distributor, under unchanged overall market policies, is responsible for delivering goods and after-sales service to the two supermarkets, enjoying the operating profits and bearing the return issues. The company and distributor sign an agreement where the distributor bears the debt issues of the two supermarkets.

C. The company transfers the distributor's previously advanced funds for the supermarkets into usable credit, provided all documents are complete. For later deliveries, the distributor's delivery receipts or supermarket inspection forms are also converted into corresponding goods supply.

D. The company's local sales staff manage the delivery receipts and inspection forms, periodically bringing them to the company's finance for verification and approval of shipping amounts, and are responsible for payment collection.

E. The distributor is responsible for all other terminal market stocking funds outside the supermarkets, which must arrive at the company's account on time.

F. This solution is limited to two months. After the peak season, when the distributor's funds normalize, the two supermarkets will be re-contracted and returned to the distributor's management.

Through these methods, Mr. Wang not only solved the distributor's capital shortage for peak season stocking in the C market, ensuring healthy market development, but also gained the distributor's approval by focusing on profit distribution. The final result was a major breakthrough in sales during the peak season, and payments arrived on time after the season.

The above methods are just a part. Each company can find its own suitable methods based on its situation, and can flexibly combine these methods to solve distributor stocking capital issues.

As the saying goes, "Marketing is like water, with no fixed form." Market solutions similarly have no fixed model or solution. Finding the right solution based on actual conditions is the key to work.

Source: China Marketing Communication Network

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