Opening Tips:
- All business is about financial accounting; a distributor's business is essentially a quasi-financial operation.
- From the perspective of the income statement, brand owners play different contributing roles; from the balance sheet perspective, brand owners form different combinations.
Background Dazhong Company is an important distributor of Tiantian Candy. In Dazhong, Tiantian Candy's sales this year are 49 million yuan; Tiantian requires a growth of 5 million yuan this year, reaching 54 million yuan. Account manager Li Hong has made a military pledge to the company that the sales target must be achieved. Dazhong is currently in a tight working capital situation, and financing channels are not smooth; various manufacturers have proposed their own sales growth targets in next year's plans. General Manager Lao Zhang appears calm on the surface but is anxious inside; there is really no money.
Problem If you were Li Hong, how would you achieve the 5 million yuan increment through Dazhong?
Analyzing the Problem 1) Identify the core issue. The expected sales increase is 5 million yuan, but the problem is not how to increase sales, but the capital shortage. The background mentions two issues regarding Dazhong's capital shortage:
First, its own financing channels are not smooth; it has no money and cannot borrow money.
Second, all manufacturers are talking about next year's growth, which means they all need capital, more money.
2) Identify constraints. The problem states that Li Hong must achieve the increment "through Dazhong," meaning the solution cannot involve opening new distributors.
3) Define the real problem. Dazhong is short on working capital; Tiantian wants a 5 million yuan increment. How to solve the working capital issue?
4) Find solutions. Since working capital shortage is the core issue, we should focus on the denominator of ROI—working capital. This is a "denominator problem." Common mistakes in solving this problem include always thinking about a) how to increase sales by 5 million, b) increasing the distributor's gross profit, or c) reducing expenses. These numerator factors are not the key; the key is that the distributor has sufficient funds to support Tiantian's increment.
Analysis There are two directions to solve the money shortage: First, tap internal potential: Use the same amount of money as last year to generate more sales. If we take the internal approach, we need to see where Tiantian can improve capital efficiency. There are four elements to analyze:
- Cash advances;
- Accounts receivable;
- Inventory capital;
- Accounts payable.
Second, seek external resources: Use other people's money to do your own business. Here we can consider two types of "others": From Tiantian Candy's perspective, "others" are the other brands that Dazhong distributes; from Dazhong's perspective, "others" are resources from other people in the market. Both are worth considering.
Case Study Finding internal improvement space Dazhong distributes four brands, and the case provides financial data. Let's first look at Tiantian's own data to find ways to "do more business with limited money." The blue parts are not important; focus on the red areas, which are the elements that can affect the distributor's working capital.
Working Capital The last indicator in the red area is working capital, totaling 4.04 million yuan. This is the key to the problem. Tiantian's current situation is that the money the distributor has tied up in Tiantian can turn over 12.1 times a year [working capital turnover rate], almost once a month; in other words, for every 1 million yuan of Tiantian business Dazhong does, it needs 82,000 yuan in capital [working capital ratio]. Compared with other business units, this is much more efficient, which is Tiantian's advantage. If Dazhong can only allocate 4.04 million yuan to Tiantian, and next year it must do 54 million yuan in business, the solution is: for every 1 million yuan of business, use only 75,000 yuan in capital, or turn over the capital 13.4 times a year.
How to do more business with the same working capital and turn it over faster? Three reductions and one increase: reduce the amount of advance expenses, reduce average receivables, reduce average inventory cost, and increase the amount of payables. Let's discuss each one.
Total Advance Amount The average monthly advance expenses are over 200,000 yuan, and they can be reimbursed within one month. This is equivalent to one month's receivables, with the brand owner as the debtor. This capital occupation is not large, and there is not much room to squeeze.
Receivables Receivables are high, at 2.94 million yuan. Behind receivables is the channel structure, reflecting the proportion of credit customers such as modern trade in the overall business. There are two ways to reduce the receivables ratio [receivables / annual total sales]:
Method 1: Negotiate with retailers to shorten the payment terms.
Retailers will say, "Pfft, why should I shorten the payment terms for you? Are you mentally deficient? I've been thinking about extending them further. Do you have any shame?" (This is an elegant long sentence, particularly showing skill, and it's quite satisfying to write.)
That's okay; in business, everything is negotiable. Brand owners and distributors can use resources to exchange for shorter payment terms, such as increasing expenses in other areas to get retailers to shorten payment terms. This is similar to Iraq's "Oil for Food" program. Some onlookers may worry that this will increase expenses and reduce operating profit. Weighing the pros and cons, when working capital is tight, we focus on protecting the denominator; if it goes down, so be it.
Method 2: Change the channel structure, putting the increment as much as possible on cash customers.
This is easy to understand: increments from cash customers do not generate receivables, directly solving the receivable problem. But changing the channel structure also faces two difficulties:
Difficulty 1: The proportion of modern trade is increasing. Most brand owners value modern retail channels and require continuous growth there. This structure is not something you can change at will.
Difficulty 2: Cash customers are becoming fewer. Those who can pay cash are usually small customers. Why are they willing to pay cash? They are smart and know that delaying payment has benefits, but they are still weak and lack bargaining power. Once they grow a bit, they will definitely demand credit terms. In actual regional sales work, when discussing increments, the first thing to consider is where, in which channel, and with which customers the increment will occur—this is the "Where to Play" question. Different battlefields have different receivables, and receivables often account for a large proportion of working capital.
Average Inventory Cost Inventory control is the biggest highlight in Tiantian Candy's business. As an ambient snack food, achieving 52 turns a year, once every seven days, is already admirable, and there is little room to further reduce inventory capital. If you really want to reduce inventory further, although difficult, it is theoretically possible. The level of inventory essentially depends on only two factors: Order cycle — how often you order (every few days); Lead time — how many days it takes for each order to arrive. (For the specific reasons, you can search for "Economic Order Quantity model".) Thus, there are three ways to reduce inventory:
Method 1: Shorten the order cycle.
For example, if you previously ordered every 7 days and now order every 3 days, just this change can reduce inventory by more than 30%. But this also brings a problem: higher order frequency means each order amount will decrease, which hits a roadblock set by the brand owner: the Minimum Order Quantity (MOQ). If you can't reach the MOQ, they won't ship. But these things don't stump salespeople who have been through thunder: order more fast-moving staple items as "fillers" on each truck, arrange for downstream customers to pick up the goods in advance, pay first, and when the truck arrives, unload and take away directly. This keeps inventory turnover days almost zero, helps achieve the desire to shorten the order cycle, and is a dark, damp, and good method that benefits the country and the people.
Method 2: Reduce lead time.
This is usually difficult to achieve because the distance from the shipping warehouse to the receiving location is fixed, and the transportation mode is fixed, so lead time is hard to adjust unless you change the shipping location. In one project, I saw a brand owner set up a transit warehouse in a corner of the distributor's own warehouse. You could order with a whistle, and the lead time from order to arrival was 0.5 hours, with order frequency at any time, and inventory costs were controlled very well. The core of the story is that the brand owner bears the inventory, easing the distributor's capital pressure, effectively becoming a consignment system.
Method 3: Directly reduce, forcibly reduce.
The advantage is that it will definitely reduce inventory levels; the disadvantage is that it will cause stockouts for downstream customers. This can be used as a last resort.
Accounts Payable What we discussed earlier is the money the distributor advances. Accounts payable is different; this is money the distributor can owe to others. The default assumption is that the distributor owes the brand owner money, but we can broaden our thinking. The path to owing money is open; once people lose their bottom line, money will inevitably increase. Here, "others" are not just the brand owner, but also other creditors, such as secondary distributors or supply chain financiers. Can the company allow the distributor to owe some money? Most brand owners will directly refuse, firmly defending the good tradition of no credit sales. All business ultimately comes down to financial accounting; the distributor business is essentially a quasi-financial operation. With careful calculation, maybe giving the distributor a credit line plus payment terms is a better choice, provided the company's own cash flow is healthy. The supply chain financiers emerging in the industry are a new force, a vibrant force, and a good topic to discuss slowly later. In summary, tapping internal potential is possible but difficult. The biggest opportunity lies in controlling receivables, followed by inventory, but the magnitude will not be large. Let's try other methods, such as taking money from others' pockets.
Seeking External Sources of Funds Before looking for money, let's first study how much money is short. If we maintain the current channel strategy, meaning next year's channel structure is similar to this year's, then the "working capital ratio" will not change much, still around 8.2%, using 82,000 yuan for every 1 million yuan of business. Next year, to increase business by 5 million yuan, an additional 410,000 yuan of capital is needed. From this perspective, the problem becomes: how to find 410,000 yuan of working capital outside the Tiantian business unit. When a distributor represents several brands, the roles of the brands differ, and different brand combinations produce different synergies. As shown in the figure below, bringing brand roles into the numerator of ROI and product mix into the denominator forms a manufacturer role model. From the income statement perspective, brand owners play different contributing roles; from the balance sheet perspective, brand owners form different combinations.
Finding opportunities from Dazhong's other business units Tiantian intends to persuade Dazhong to transfer funds from other business units to the Tiantian business unit, provided that Dazhong's General Manager Zhang recognizes that investing funds in the Tiantian business unit can generate greater benefits. Looking at the "Business Unit Comparative Analysis Report," find opportunity points:
Look at ROI. Transfer funds from business units with low ROI to those with high returns.
Don't touch Shuangqiao; its ROI is as high as 34.4%. No businessperson would reduce its resource investment.
Weilan Beverage and Gaoxin Daily Chemicals have ROIs lower than Tiantian, so they can be considered. Weilan and Gaoxin have similar working capital, around 2.5 million yuan, but Weilan's operating profit is lower, so its ROI is the lowest at only 17.4%. Persuading General Manager Zhang to reduce investment in Weilan has a higher chance of success.
Weilan's opportunity lies in inventory. After reviewing Weilan's denominator data, the inventory opportunity seems relatively large. If we can reduce inventory turnover days from 25 to 20, a 20% reduction, we can save 300,000 yuan, solving a large part of Tiantian's problem.
Gaoxin's inventory opportunity is even greater. Gaoxin's inventory turnover days reach 40, the highest among all brands. Looking at the inventory return on investment indicator, it is only 0.8, meaning that investing 1 yuan in Gaoxin's inventory yields only 0.8 yuan in return over a year, while Tiantian's is 2.4, three times that of Gaoxin. A simple way to reduce Gaoxin's inventory is to increase its order frequency, as discussed earlier. If Gaoxin can reduce inventory from 40 days to 30 days, a 25% reduction, it can save 370,000 yuan, basically solving Tiantian's capital problem.
Returning to Shuangqiao, if we explore reducing its expense advances, it would be a win-win situation. Unlike the inventory reduction mentioned earlier, which brings potential sales loss, reducing expense advances is not dangerous. If Shuangqiao agrees, it can reduce capital occupation; if not, we can just pretend we didn't discuss it, with no loss.
Seeking capital opportunities from the periphery The methods just mentioned are all about finding capital internally; we can also look at external capital opportunities. For example: Dazhong has newly taken on a brand A, with an annual purchase of 7.2 million yuan, 20,000 yuan per day, and the brand owner is willing to give 30 days of credit. Dazhong mainly does fast-moving, cash-settled distribution channels, with inventory turnover controlled at 15 days. Dazhong occupies 15 days of brand A's funds, meaning 20,000 yuan per day in purchase amount. Let's list the formula: 720/360*(30-15)=30, so Dazhong actually occupies 300,000 yuan of brand A's funds. This method can also solve part of the capital pressure. The Dazhong case ends here. Let's summarize: The problem-solving approach in this case is a typical "formula method." That is, after getting the problem, determine which formula to use as the analytical framework; here, ROI is used. The purpose is not just to calculate ROI, but to use each element in the formula as a clue to expand the problem-solving process, helping people systematically and deliberately unravel the problem and find solutions.
Source: Weizhi -END-