Introduction:

  1. All business is essentially about financial accounts; a distributor's business is a quasi-financial operation.
  2. From the perspective of the income statement, brand owners play different contributing roles; from the balance sheet perspective, they form different combinations.

Background: Dazhong Company is an important distributor of Tiantian Candy. At 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 with the company that the sales target must be achieved. Dazhong is currently in a state of tight working capital and has poor financing channels; 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 really is 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 business growth is 5 million yuan. The problem is not how to increase sales, but the tight capital. The background mentions two issues regarding Dazhong's capital tension: First, its own financing channels are poor; it has no money and cannot borrow. 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 growth "through Dazhong," meaning the increment cannot be solved by opening new distributors.

3) Define the real problem. Dazhong is short on capital; Tiantian wants a 5 million yuan increment. How to solve the working capital?

4) Find solutions. Since tight working capital is the core issue, we should focus on the denominator of ROI—working capital. This is a "denominator problem." Common mistakes in solving this include constantly thinking about:

a. How to increase sales by 5 million; b. Increasing the distributor's gross profit; c. How to reduce expenses. These numerator factors are not the key; the key is that the distributor has sufficient funds to support Tiantian's growth.

Analysis: There are two directions to solve the money shortage: First, tap internal potential: use the same money as last year to generate more sales. If we take the internal approach, we need to see where Tiantian can improve capital efficiency. Four elements can be analyzed:

  1. Cash advances;
  2. Accounts receivable;
  3. Inventory capital;
  4. 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's perspective, "others" are other brands that Dazhong distributes; from Dazhong's perspective, "others" are resources from other players in the market. Both are worth considering.

Case Study: Finding internal room for improvement Dazhong distributes four brands, and the case provides financial data. Start with 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 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: 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 needs 82,000 yuan in capital [working capital ratio]. Compared to other business units, this is much more efficient—this is Tiantian's advantage. If Dazhong can only allocate 4.04 million yuan to Tiantian, and next year must do 54 million yuan in business, the solution is: use only 75,000 yuan per 1 million yuan of business, or turn over capital 13.4 times a year. How to do more business with the same working capital and faster turnover? Three decreases and one increase: reduce the amount of advance expenses, reduce average receivables, reduce average inventory cost, and increase accounts payable. Let's discuss each.

Total Advance Amount Average monthly advance expenses are over 200,000 yuan, which can be reimbursed within one month. This is equivalent to one month's receivables, owed by the brand owner. This capital occupation is not large, and there is little room to squeeze.

Accounts Receivable 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 period. The retailer will say, "Why should I shorten the payment period for you? Are you mentally deficient? I've been wanting to extend it all along. Do you have any shame?" (This is an elegant long sentence that shows skill and is fun to write.) It doesn't matter. In business, everything is negotiable. Brand owners and distributors can exchange resources for payment terms, such as increasing expenses in other areas to get retailers to shorten payment periods. This is similar to Iraq's "Oil-for-Food" program. Some onlookers may worry that this increases costs and reduces operating profit. When weighing two evils, choose the lesser. When working capital is tight, we focus on protecting the denominator; if it goes down, so be it.

Method 2: Change the channel structure, placing 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 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 growth, the first consideration should be where, in which channel, and with which customer to grow—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 of Tiantian Candy's business. As an ambient snack food, achieving 52 turns a year, once every seven days, is already admirable. There is little room to further reduce inventory capital. If you really want to reduce inventory further, although difficult, it is theoretically possible. Inventory levels essentially depend on only two factors:

  • Order cycle—how often you order (every few days);
  • Lead time—how many days it takes for delivery after ordering. (For why these two factors, 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, reducing inventory by more than 30% is definitely not a problem. But this also brings a problem: higher order frequency means each order amount will decrease, which hits a roadblock set by the brand owner: 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 struck by lightning: order more fast-moving, common items on each truck as "fillers," find downstream customers in advance to take delivery, pay first, and when the truck arrives, unload and take away. Inventory turnover days are almost zero, and it helps people achieve the desire to shorten the order cycle. It's a dark, damp, and beneficial method for the country and the people.

Method 2: Reduce lead time. This is usually difficult. The distance from the shipping warehouse to the receiving location is fixed, the transportation mode is fixed, and the 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 time from order to delivery was 0.5 hours, with order frequency at any time, and inventory costs were controlled beautifully. 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, hard reduce. The advantage is that it will definitely reduce inventory quantity; the disadvantage is that it will cause stockouts for downstream customers. This can be used as a last resort.

Accounts Payable The above discussed the distributor's own advanced money. Accounts payable is different—this is money the distributor can owe others. The default assumption is that the distributor owes the brand owner money. But you can broaden your thinking: the path to owing money is open. As long as people lose their bottom line, money will inevitably increase. Here, "others" can include not only brand owners but also other creditors, such as secondary distributors or supply chain financiers. Can a company let distributors owe some money? Most brand owners will directly refuse, firmly defending the good tradition of no credit sales. All business is ultimately a financial account; the distributor business is a quasi-financial operation. After careful calculation, giving distributors credit limits plus payment terms might be 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 viable force. It's a good topic; let's discuss it slowly when we have time.

To summarize, 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" indicator will not change much, still around 8.2%. For every 1 million yuan of business, 82,000 yuan is needed. Next year, to increase business by 5 million yuan, an additional 410,000 yuan is needed. From this perspective, the problem becomes: how to find 410,000 yuan in working capital outside the Tiantian business unit.

A distributor distributes several brands, and the roles of brands differ. 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, they 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 unit, provided that General Manager Zhang of Dazhong recognizes that investing funds in the Tiantian unit can generate greater benefits. Look at the "Business Unit Comparative Analysis Report" to find opportunities: 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 Chemical 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, and its ROI is the lowest at only 17.4%. Persuading General Manager Zhang to reduce investment in Weilan is more likely to succeed. Weilan's opportunity lies in inventory. After reviewing Weilan's denominator data, inventory seems to have relatively large potential. 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 investing 1 yuan in Gaoxin's inventory yields only 0.8 yuan in a year, while Tiantian 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 discuss 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 pretend we never discussed it, with no loss.

Seeking external capital opportunities 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 purchases. Let's formulate: 720/360*(30-15)=30, so Dazhong actually occupies 300,000 yuan of brand A's funds. This method can also relieve some 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 receiving 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 for expansion, helping people systematically and deliberately unravel the problem and find solutions.

Source: Weizhi (ID: gh_98f8e108c99d) If the tip is adopted, a reward of 400-2000 yuan will be paid.