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We often hear distributors complain: insufficient funds! Because of insufficient funds, business expansion is hindered; because of insufficient funds, they earn much less each year; because of insufficient funds, they order fewer promotional goods during manufacturer activities; because of insufficient funds, they fail to meet annual targets set by manufacturers at year-end... and so on. In reality, we also often see distributors scrambling for funds, borrowing everywhere, especially as the year-end approaches and goods sell briskly; many even resort to high-interest loans to get by.
How can distributors end this recurring "grain shortage"? The causes of distributor capital shortages generally fall into the following categories.
(1) Too Many Product Lines
This is the most common situation, yet distributors are often unaware of it. For a distributor, every product they handle is certainly profitable; otherwise, they wouldn't carry it. The thinking is correct, but the practice is highly inadvisable.
Take a county distributor under my jurisdiction as an example: Before taking on our brand, he started with about 100,000 yuan in working capital. Because our brand had fast turnover and required little capital, even with only 100,000 yuan, he didn't feel a cash crunch. With surplus cash, he didn't want it idle, so six months later he took on a beer brand from Fujian. Beer requires hotel terminal sales, especially mid-to-high-end brands, which immediately tightened his funds. But because our brand occupied little capital and turned over quickly, with visible monthly profits, he managed to recover after a few tough months. Then he took on a peanut milk brand from Hubei. Later, he added an apple cider vinegar from Henan, a instant noodle brand, and a baijiu brand from us that required hotel sales. The more he did, the more strained he felt, and the less cash he had to pay for goods, even for our fast-moving bestsellers. Why? Because his funds were tied up in inventory and hotel receivables from all these brands!
Were these brands profitable? Certainly! Once goods are sold, they become money. But the turnover rate is always limited, and how much can unsold goods earn? The market requires investment and distribution to operate. This distributor pinned his hopes on the eventual sale of goods, ignoring the basic concept of turnover speed and the fundamental risks of market operations.
Because this endangered our brand's market security and expansion, I analyzed the situation and issued an ultimatum (either give up our distribution rights and choose another brand, or keep our brand and cut some non-essential brands to ensure our brand's supply of funds). Only then did he reluctantly give up some brand distribution rights.
(2) Greed for Promotional Policies
When promotions are announced, many distributors wish they could borrow money to haul back all the promotional goods, especially for best-selling brands.
Everything has a limit; one must know when to stop. Manufacturers naturally want more payments during promotions, but those who truly understand the market also know the limits. If you stock up too much and don't reorder for three or four months, the manufacturer's sales staff and executives will mark your market as unhealthy, reducing future support. Meanwhile, those promotional goods sit in your warehouse for months, tying up capital, and the interest on borrowed funds eats into your profits—you still don't make money!
Of course, for unscrupulous brands that don't plan to stay in your market long-term, they'd welcome you stocking up even two years' worth. But when you need returns, exchanges, or help with slow-moving products, they're nowhere to be found.
(3) Preference for Credit Sales
Credit sales to hotel terminals are sometimes unavoidable. But hotel credit sales have their nuances; they are not without limits. Distributors with some market influence are often among the biggest creditors in their markets. Supermarket and hotel payment deferrals are expected; credit sales to key accounts in the distribution channel are normal; credit sales to government units are unavoidable... In short, there are countless reasons for credit sales.
From the distributor's heart, besides market needs, the private thought is that credit sales ultimately make money. As long as there's profit, distributors often get drawn in involuntarily, until they realize it's a trap and it's too late to back out.
High-profit credit sales often come with high risks! If distributors underestimate this, once they fall into the credit trap, how can funds not be tight?!
One of my distributors handling high-end products has a special fondness for special channel operations. As long as special channels order, he's willing to extend unlimited credit. For distribution channels, where payments could be quick, he shows little interest because the profit seems low. So year-round, he has no money to pay the company, and his capital operations are always strained. He doesn't know how to use the funds of secondary wholesalers to serve special channels, always wanting to capture high profits himself, but at year-end, he still doesn't get them.
(4) Overestimating One's Capabilities
Do what your capabilities allow. But some distributors overreach, taking on more than they can handle, leading to cash flow problems.
I know a distributor who handled a Great Wall dry red wine brand. Initially, because he knew the local market well, within two years the brand became the top red wine in his region, and he made some money. Seeing his capability, the manufacturer gave him the supply rights for all supermarkets (mainly chain or large local supermarkets) in the entire province. He thought it was a "golden opportunity," but within a year, he faced severe capital shortages. The capital tied up in supermarkets (especially during the Spring Festival peak) far exceeded his capacity. This led to a three-month wage arrears, causing strikes and resignations, and a shortage of funds to pay for other brands, resulting in stockouts. He was badly hurt and finally had to terminate the provincial supermarket supply agreement with the wine manufacturer, retreating to his home turf.
This is a classic case of overambition and overextending leading to capital shortage. It's not that such things can't be done, but one must estimate their limits. Some small distributors fall into this trap, insisting on directly supplying all supermarkets in their area with limited funds, covering all channels without focusing on their strengths, ignoring the importance of the "food chain."
Overestimating one's capabilities naturally leads to self-inflicted suffering.
(5) Not Using One's Brain
Distributors must learn to seize opportunities and leverage resources. Some distributors have quick minds; they're several steps ahead of manufacturer reps. But distributors have a common flaw: they're sharp when calculating against manufacturers, but when it comes to their own business, they have a muddled account. Especially small and medium distributors, who never tally their accounts from year start to end, neither knowing where they lose money nor how much profit their profitable products actually bring. With such management, how can they ensure the rationality of fund flow and usage? How can they avoid the "old problem" of always feeling short of funds?
(6) How to Solve Capital Shortages
Now that we've identified the causes, we can find solutions. Here are the "prescriptions":
1. Focus on Product Categories
"A mountain need not be high; it's the immortal that gives it fame." Goods need not be many; as long as they make money, it's enough. Distributors must resist temptation, especially those who've made money with a brand. There are many profitable brands on the market, but you can't do every business. Trying to catch everything results in catching nothing, and you might even get caught yourself.
Generally, even when choosing new products, distributors should focus on similar or related channel products, avoiding brands with similar positioning. If capital isn't particularly abundant, distributors shouldn't handle more than three brands. Also, it's worth reminding distributors not to carry more than three product variants per brand, unless they're replacements. Nowadays, manufacturers often develop brands with series products, seemingly to trap distributor funds. If distributors think they must carry 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 do the math, ignoring the basic business principle of "goods turning like a wheel." Based on our experience, no matter how strong the promotion, stocking should be at most 1.5 times normal sales, and never more than 2 times. You must understand: during big promotions, you want to stock up, and so do other distributors. What happens when everyone overstocks? Prices get slashed! Once prices are slashed, your hopes of profiting from overstocking vanish, and you're stuck with tied-up capital.
In fact, smart manufacturers, having learned from past experiences, now guard against distributor greed by implementing limited promotions. Only unscrupulous manufacturers or brands continue to use this trick to trap distributor funds. So, distributors should be careful not to fall into others' "money traps" due to greed.
3. Treat Credit Sales with Caution
Credit sales are more or less inevitable for distributors; it's a hurdle that can't be avoided. Unlike manufacturers, distributors must pay upfront to get goods. Facing such an environment, distributors need to keep their eyes open, ideally establishing a credit assessment standard for their market and strictly enforcing it. The danger is when distributors act on feeling, thinking credit sales are profitable and keep shipping goods, only to regret it when they can't collect later.
For best-selling products, strictly prohibit credit sales; for non-best-sellers, use credit sales purposefully; for new products, share credit risk with the manufacturer. By controlling the degree of credit sales and having manufacturers share the risk, distributors can free up their capital.
4. Cut Your Coat According to Your Cloth
Do what your capabilities allow. Moving from county-level agency to prefecture-level, then to provincial, or even national distribution sounds wonderful, but you must weigh your own capacity. Expanding territory means a surge in capital needs, not to mention management issues.
A few years ago, the craze for buying out brands produced countless national distributors. But after the tide receded, how many truly made a national impact? The biggest obstacle to their national dreams was capital shortage.
5. Use Your Brain
Solving capital shortages relies more on distributors using their brains and finding ways. For example, during peak seasons, some manufacturers open a "green channel" for distributors with good credit and years of cooperation, supplying goods first and collecting payment later through flexible arrangements.
Take supplying national chain supermarkets: typically, the supply contract is signed by the manufacturer under one account, then different regional distributors supply these chains separately. The manufacturer issues VAT invoices, and supermarket payments are made monthly directly to the manufacturer's account, which then distributes to each supplying distributor. Distributors pay upfront to get goods from the manufacturer, but they must supply supermarkets on credit, settling monthly or even quarterly. During peak seasons, distributors face enormous capital pressure. If they can enjoy the manufacturer's "green channel service," it relieves the immediate crisis. To qualify, distributors must maintain good credit and become trusted customers of the manufacturer.
Another method is to use secondary wholesalers' funds. At the start of each activity, call a meeting to explain the policy, require secondary wholesalers to pay deposits, and offer incentives for those who do. This method is often effective, especially for distributors of well-selling brands.
You can also use bank acceptance bills to borrow from banks and ease capital pressure.
Solutions are devised by people; it depends on whether distributors use their brains. There's always a reason for distributors frequently facing "money shortages." Find the cause, avoid old mistakes, and you'll naturally find the solution. After reading this, distributors can apply the appropriate remedies and perhaps stop feeling so anxious.
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