We often hear distributors complain about insufficient capital! Because of capital shortages, their business cannot expand further; because of capital shortages, they earn much less each year; because of capital shortages, they are forced to order fewer promotional goods during manufacturer activities; because of capital shortages, they may even fail to meet the manufacturer's annual targets at year-end... and so on. In reality, we also often see distributors scrambling to raise funds and borrowing from various sources, especially as the year-end approaches and goods sell briskly, many even resort to high-interest loans to get by.
What is the actual situation? How can distributors end this constant "grain shortage"?
The causes of capital shortages for distributors generally fall into the following categories:
- Too Many Product Lines This is the most common situation and is often unnoticed by the distributor themselves. For a distributor, every product they handle is certainly profitable; otherwise, they wouldn't carry it. The idea is correct, but the practice is very unwise.
Take the example of a county distributor under my supervision: Before carrying our brand, he started with about 100,000 yuan in working capital. Because our brand had fast turnover and required little capital, even 100,000 yuan in rolling funds didn't feel tight. With surplus funds, he didn't want the money idle, so six months later he took on a beer brand from Fujian. Beer requires hotel sales, especially for a mid-to-high-end brand like his, so capital suddenly became tight. But because our brand occupied little capital and 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 from Henan, a instant noodle brand, and a baijiu brand that required hotel sales. The more he did, the more he felt the strain, and the less money he had to pay for goods. Eventually, he couldn't even raise funds to pay for our fast-moving, best-selling products. Why? Because the capital was tied up in the inventory of these brands and the receivables from hotels!
Were these brands profitable? Certainly! As long as goods are sold, they bring money. But the turnover speed of goods is always limited, and if goods don't turn over, how much profit can they generate? The market is not like the planned economy era where goods could be sold without even unloading the truck; now you need to spend money, distribute goods, and operate the market. He pinned his hopes on the future sale of goods, ignoring the basic concept of turnover speed and the risks of market operations—a utopian idea.
Because this endangered the market safety and expansion of our brand, after analyzing the situation and issuing an ultimatum (either he gave up our brand's distribution rights and chose another brand, or he kept our brand and cut some non-essential brands to ensure capital supply for our brand), he reluctantly gave up the distribution rights of some brands.
- Overindulging in Promotional Policies When promotions are announced, many distributors wish they could borrow money to bring in all the promotional goods, especially for best-selling brands.
Everything has a limit; you need to know when to stop. Manufacturers naturally want more payments, but those who truly understand the market also know the limits of promotions. If you stock up so much that it takes three to four months to sell through and you don't order a second batch, the manufacturer's sales staff and management will mark your market as unhealthy, and future support will decrease. Meanwhile, those promotional goods sitting in your warehouse for three to four months not only tie up capital but also 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 stock, they're nowhere to be found.
- Preferring Credit Sales Credit sales to hotels are sometimes unavoidable. But credit sales to hotels require skill; they shouldn't be an endless bottomless pit. Distributors with some market influence are often among the biggest creditors in their markets. Supermarket and hotel payment delays are common; credit sales to key accounts in the distribution channel are normal; credit sales to government units are unavoidable; there are countless reasons for credit sales.
Deep down, besides market needs, the private thought that credit sales can make money is also a hidden motive. Aren't distributors said to be profit-driven? As long as they see profit, they 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 capital not be tight?
One of my distributors handling high-end products has a special fondness for special channels. As long as special channels order, he's willing to extend unlimited credit. For the distribution channel, where goods could quickly turn into cash, he shows little interest because the profit seems small. So for him, he never has money to pay the company all year round, and his capital operation is always tight. He doesn't understand how to use second-tier distributors' funds to support special channels; the more he hopes for high profits, the less he actually gets at year-end.
- Overestimating One's Abilities Do what you can handle. But some distributors bite off more than they can chew, leading to capital chain problems.
I know a distributor who handled a Great Wall dry red wine brand. Initially, when he took over the agency in his local market, he knew the market well, and 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 "sweet deal," but within a year, he faced severe capital shortages. The capital tied up in supermarkets (especially during the Spring Festival peak season) far exceeded his capacity. Subsequently, a three-month wage arrears led to strikes and resignations, and the lack of funds to pay for other brands caused stockouts, severely damaging his business. Finally, he had to terminate the provincial supermarket supply agreement and retreat to his home turf.
This is a classic case of overambitious goals and overextended front lines leading to capital shortages. It's not that such things can't be done, but you must estimate your limits. Many small distributors fall into this trap, trying to directly supply all supermarkets in their area with limited funds, spreading across the entire network without focusing on their strengths, ignoring the importance of the "food chain."
Overestimating oneself naturally leads to self-inflicted suffering.
- Not Using Your Brain Distributors need to seize opportunities and leverage resources. Some distributors are quick-witted, thinking several steps ahead of manufacturer reps. But distributors have a common flaw: they're sharp when calculating against manufacturers, but when it comes to reviewing their own operations, they're in a fog. Especially small and medium distributors, they never do a year-end accounting, neither knowing where they lost money nor how much profit their profitable products actually brought. With such management, how can capital flow and usage be rational? How can they avoid the chronic problem of always feeling short of funds?
Now that we've identified the causes, we can find solutions. Here are the "prescriptions":
- Focus on Product Categories "A mountain doesn't need to be high; if it has immortals, it's famous." Goods don't need to be many; as long as they make money, it's fine. Distributors must resist temptation, especially those who have made money with a certain brand. There are many profitable brands in the market, but you can't do every business; trying to catch everything in one net results in catching nothing and getting tangled yourself.
Generally, when choosing new products, distributors should focus on similar or related channel products, avoiding brands with identical positioning or direct competition. Unless you're particularly wealthy, it's advisable not to handle more than three brands. Also, note that each brand's product line shouldn't exceed three items, unless it's a replacement product. Nowadays, manufacturers often develop brands with a series of products, seemingly to tie up distributor capital. If distributors think they must carry all products under a brand, they'll inevitably fall into capital shortages.
80% of sales come from 20% of products—this is the golden rule.
- Avoid Overindulgence Distributors who overindulge in promotional policies often fail to do detailed calculations and don't understand the basic business principle of "goods turning like a wheel." Based on our experience, no matter how strong the promotion, your stockpile should be at most 1.5 times your normal sales, and never more than double. You must understand that if you want to stock up more during a big promotion, other distributors do too. What's the result of everyone overstocking? Price cuts! Once prices are cut, your hope of making money from overstocking evaporates, and you're left with capital tied up.
In fact, smart manufacturers, after lessons from previous years, are wary of distributors' overindulgence and have introduced limited-quantity promotions. Only unscrupulous manufacturers or brands continue this trick of tying up distributor capital. So, distributors should be careful not to fall into the trap of "money-raising" schemes.
- Be Cautious with Credit Sales Credit sales are inevitable for distributors to some extent; it's a hurdle that can't be avoided. Unlike manufacturers, distributors must pay upfront to get goods. Given this environment, distributors need to keep their eyes open and ideally establish a credit assessment standard for their market and strictly enforce it. The danger is when distributors act on gut feeling, extending credit liberally because it seems profitable, only to regret it when they can't collect.
For best-selling products, strictly prohibit credit sales; for non-best-sellers, extend credit purposefully; for new products, share credit with the manufacturer. By controlling the degree of credit and having the manufacturer share the risk, distributors can free up capital.
- Tailor to Your Size Do what you can handle. Moving from county-level agency to prefecture-level, then to provincial, or even national distribution sounds great, but you must weigh your capacity. Expanding territory means a surge in capital needs, not to mention management issues.
A few years ago, the craze of buying out brands produced countless national distributors, but how many actually made a national impact? The biggest obstacle to their national expansion was capital shortage.
- Use Your Brain Solving capital shortages relies more on distributors thinking creatively and finding solutions. For example, during peak seasons, some manufacturers offer "green channels" for distributors with good credit and long cooperation history, supplying goods first and collecting payment later. How does it work? For supplying national chain supermarkets, the manufacturer signs a unified contract, then designates distributors in different regions to supply these chains. The VAT invoice is issued by the manufacturer, and supermarket payments are made monthly directly to the manufacturer's account, which then distributes to each distributor. Distributors pay upfront for goods supplied to supermarkets, but supermarket payments are on credit, settled monthly or even quarterly. During peak seasons, the capital pressure is immense. If distributors can enjoy the manufacturer's "green channel service," it relieves the immediate pressure. To qualify, distributors must maintain good credit and become trusted customers.
Another method is using second-tier distributors' funds. At the start of each activity, call a meeting to explain the policy, require prepayments from second-tier distributors, and offer incentives for those who pay in advance. This is often effective, especially for distributors of well-selling brands.
You can also use bank acceptance bills to borrow from banks to ease capital pressure.
Solutions are devised by people; it depends on whether distributors use their brains. Capital shortages and constant "money panics" certainly have reasons. Find the cause, avoid old mistakes, and you'll naturally find solutions. After reading this, distributors might find the right remedy and stop worrying.
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