How Can Trading Companies Strengthen Risk Prevention?

Enhancing risk prevention awareness is a serious challenge for every trading company. Currently, food trading companies mainly face operational risks from upstream manufacturers and risks from downstream supermarket closures causing bad debts.

Controlling Upstream Manufacturer Cooperation Risks

When selecting upstream partner manufacturers, the marketing department of a trading company should grasp several fundamental principles:

Don't put all eggs in one basket. In the early stages of operation, due to resource constraints, trading companies often start by acting as agents for a single brand and gradually develop. This is understandable. However, it is important to realize that this approach is like putting all eggs in one basket. If the upstream brand encounters problems, it can be fatal for the distributor. Therefore, trading companies must evolve from single-brand operations to multi-brand operations, transitioning into comprehensive distributors. When selecting related brands, they should base decisions on the category structure of the departments in downstream supermarkets, and introduce upstream partner manufacturers in a planned and targeted manner. By following the principles of different categories from different manufacturers and different price bands within the same category, they can effectively reduce risks arising from upstream manufacturers' own issues.
Don't turn cash-on-delivery into payment-before-delivery. Due to rising raw material prices and persistently high labor and transportation costs, more and more manufacturers are requiring agents to settle transactions on a cash-on-delivery basis, meaning agents remit payment first, and the manufacturer ships goods after receiving payment. This cash-on-delivery model inadvertently increases the burden on distributors and raises their risks. When distributors pay first and manufacturers ship later, it is not strictly cash-on-delivery. True cash-on-delivery means one hand pays, the other delivers, with money and goods settled simultaneously. When distributors pay in advance, there is a risk that manufacturers may not deliver on time. Some upstream manufacturers, due to capital shortages, may only organize raw material procurement and production after receiving payment. If the capital chain breaks, the consequences are unimaginable. How should distributors avoid such risks? 1. Negotiate with manufacturers to collect a partial deposit based on product sales volume to mitigate some risk; 2. Effectively control the proportion of cash-operated brands in overall sales; 3. For orders, order less but more frequently based on actual sales, and strictly specify delivery deadlines; 4. Don't be tempted by small gains or listen to one-sided statements from manufacturer salespeople, such as promises of extra rebates for larger payments; 5. Maintain relatively high gross margins for products from cash-on-delivery manufacturers to offset some risks.
Reasonably control advance payments and fees. In cooperation with manufacturers, distributors inevitably encounter issues related to payment of fees. Fees such as shelf fees and promotion fees, which are generally borne by manufacturers, are best paid by the manufacturer in advance. If it is agreed to deduct them from accounts, the sooner the better. This avoids capital occupation and prevents problems arising from long offset periods, such as the inability to verify expenses due to the departure of relevant manufacturer salespeople. Additionally, when agreeing on related fees with manufacturers, written signatures and approvals are essential, not just verbal agreements.
Fully consider after-sales service. As agents for manufacturers' products, trading companies are not only executors of sales but also extensions of product service. In cooperation with downstream supermarkets, issues of returns and exchanges are inevitable. Therefore, when negotiating contracts with manufacturers, it is necessary to fully consider product characteristics and packaging features, and negotiate how to handle supermarket returns. A common practice is that manufacturers bear all costs for quality issues, while normal losses can be offset by setting a certain rebate rate, deducted directly at each payment. Distributors can use this rate to write off damaged goods directly, avoiding accumulation.

The cooperation models and risk assessment list are as follows:

Avoiding Downstream Supermarket Cooperation Risks

Risks in cooperation with downstream supermarkets mainly stem from poor management leading to closures, resulting in unrecoverable payments. Every year, there are reports of supermarket closures affecting distributors in various regions. Especially now, when the global financial crisis has begun to impact the real economy, no one can predict who will fall next. In the current social environment, in supermarket closure events, the interests of suppliers are often considered last by relevant authorities.

So how should trading companies enhance risk prevention awareness at this stage?

Establish an early-warning mechanism through financial analysis. In cooperation with downstream supermarkets, it is unwise to be overly cautious or rely on luck. A financial early-warning mechanism should be established. First, study supermarket contract terms and conduct aging analysis. For example, a supermarket with monthly sales of 500,000 yuan, a 60-day payment term, and an average gross margin of 20% occupies 1 million yuan of distributor capital, equivalent to 10 months of gross profit. If it closes, the distributor's ten months of hard work are lost, and that's just gross profit. Given high operating costs, the loss in net profit would be even more alarming. Understanding this, in practice, distributors should convert all supermarket payment methods, whether monthly settlement or on-delivery settlement, into specific amounts of occupied capital, rank them from high to low, and the larger the amount, the higher the risk coefficient and the more attention needed. Then, the accounts receivable accountant in the finance department should use this ranking to create a "Monthly Payment Collection Plan" for management review, corresponding with actual collections. Once problems are found, they should be resolved immediately without delay.

Supermarket Monthly Payment Collection Plan:

The sales department should formulate specific operational procedures. Based on the amount of capital occupied by each supermarket, and referencing cooperation duration, comprehensive expense rate, payment terms, gross margin, historical payment records, and other relevant data, the sales department should develop operational procedures for various types of supermarkets: 1. For cash-settlement customers, regardless of cooperation duration, treat them as high-quality customers, increase investment, and raise their share of total sales. This can be done by arranging more promotions and lowering gross margins to enhance competitiveness. 2. For supermarkets with long payment terms, large capital occupation, high comprehensive expenses, and frequent payment delays, appropriately reduce investment. Regardless of their reputation or influence, they must be key prevention targets because such supermarkets are likely to expand blindly, have tight capital chains, and improve cash flow by delaying supplier payments. If necessary, plan to control shipments month by month, reduce sales, lower the occupied capital to an acceptable range, and adjust product structure by replacing highly sensitive, low-margin products with high-margin ones. 3. For customers with long cooperation and consistently good payment records, regardless of payment terms, appropriate investment can be made, gradually increasing monthly sales while maintaining stable gross margins. 4. For supermarkets with frequent malicious arrears and poor business reputation, do not harbor luck or blindly trust one-sided statements from supermarket staff. Remember that a supermarket that does not value its own business reputation will not find its place in a competitive business environment. Cooperation with such entities will have pessimistic outcomes. Decisively draw a line with them, and if necessary, use legal means to protect yourself.

In cooperation with supermarkets, trading companies must remember that increasing sales is only meaningful when payments are collected normally. Especially today, when supermarkets commonly delay payments, only by meticulously analyzing all relevant data and establishing early-warning mechanisms can risks be minimized. Completely avoiding risks is impossible, but trading companies should learn to control risks within a certain range.

Prevent problems before they occur and be adept at collecting and organizing various information. Many supermarkets show signs before serious problems arise, such as continuous delays in payment, various excuses from supermarket purchasing staff, abnormal staff turnover, chaotic product displays, out-of-stock items, and in severe cases, even issuing bad checks to distributors. This requires sales personnel of trading companies to have sufficient sensitivity to detect problems from subtle changes in supermarkets. Many large distributors can exit before supermarket closures, not only because they have a complete set of risk prevention mechanisms, but also because their sales personnel have good insight, identify problems, and take immediate action. Often, in the early stages of a supermarket's capital chain breaking, to stabilize suppliers, supermarkets will still honor business credit for those manufacturers who take action first, with the aim of avoiding expanding the impact and causing a chain reaction. This is the best time to take action. However, many sales personnel often ignore this, thinking it is temporary, and some even prioritize bonuses and commissions over company safety. Therefore, trading company owners should not only strengthen training for relevant sales personnel to enhance their risk prevention awareness, but also strengthen comprehensive communication with supermarkets, conduct regular visits, and not blindly trust one-sided statements from sales personnel. Only then can they respond quickly and deal with issues in a timely manner.

-END-