Cash is king. Especially in wholesale.
You can have great products, good margins, and loyal customers. But if you run out of cash, none of that matters.
Here’s how to keep cash flowing in your distribution business.
Why wholesale businesses struggle with cash
Distribution businesses tie up cash in two places: inventory and receivables.
Inventory: You buy products before you sell them. That’s cash sitting on shelves.
Receivables: You sell on credit. Customers pay in 30, 60, maybe 90 days. That’s cash you’ve earned but don’t have yet.
Meanwhile, your bills don’t wait. Payroll, rent, suppliers. Cash goes out before it comes in.
Growth makes it worse. More customers means more inventory. More credit extended. More cash tied up.
This is why profitable businesses run out of cash. Profit doesn’t pay bills. Cash does.
Know your cash conversion cycle
The cash conversion cycle tells you how long your cash is stuck.
Formula:
Cash Conversion Cycle = Days Inventory + Days Receivables - Days PayablesExample:
- You hold inventory for 60 days on average
- Customers pay in 45 days on average
- You pay suppliers in 30 days
Cash Conversion Cycle = 60 + 45 - 30 = 75 days
That means 75 days pass between paying for inventory and collecting from customers. For 75 days, your cash is tied up.
Lower is better. Let’s work on each part.
Reduce days in inventory
Buy smarter
Don’t overbuy. Yes, bigger orders might get discounts. But that discount costs cash.
Calculate whether the savings are worth the cash tie-up. Often they’re not.
Turn inventory faster
Identify slow-moving products. Discount them, return them, or stop carrying them.
Focus on products that sell quickly. Fast turns mean less cash tied up.
Improve forecasting
Better forecasts mean buying the right amounts. Too much inventory is cash waste. Too little loses sales.
Track what sells and when. Use the data to plan purchases.
Use reorder points
Set minimum and maximum levels for each product. Reorder at minimum. Never exceed maximum.
This prevents both stockouts and overstocking.
Collect receivables faster
Set clear payment terms
Make sure customers understand when they should pay. Put it on invoices clearly.
Don’t be vague. “Net 30” means 30 days. Not “whenever you get around to it.”
Invoice immediately
Don’t wait. When goods ship, invoice that day.
Every day you delay invoicing is a day you delay getting paid.
Follow up early
Send reminders before invoices are due. Call when they’re overdue.
Don’t be shy. It’s your money. You’ve earned it.
Enforce credit limits
Set limits for each customer. Block new orders when limits are exceeded.
This sounds harsh, but it protects your cash. Customers who won’t respect limits aren’t good customers.
Consider early payment discounts
Offer a small discount for early payment. “2% 10 Net 30” means 2% off if they pay in 10 days.
Do the math. A 2% discount for getting paid 20 days early might be worth it.
Know when to cut off credit
Some customers will never pay well. Identify them. Move them to cash on delivery.
Better to lose a bad customer than to finance their business forever.
Manage payables strategically
Take your terms
If suppliers give you 30 days, take 30 days. Don’t pay early unless there’s a discount.
Your cash. Your business. Use your terms.
Negotiate better terms
If you’re a good customer, ask for better terms. 30 days might become 45 or 60.
The worst they can say is no.
Don’t damage relationships
That said, don’t abuse payables. Suppliers who get paid late will charge more or stop selling to you.
Take your terms, but not more.
Match payables to receivables
Try to pay suppliers after customers pay you. If customers pay in 30 days, negotiate 45-day terms with suppliers.
This keeps cash flowing in before it flows out.
Other cash flow levers
Get a line of credit before you need it
Banks like to lend money to businesses that don’t need it. Weird, but true.
Get a line of credit when business is good. It’ll be there when you need it.
Waiting until you’re desperate means higher rates or rejection.
Lease instead of buy
Big equipment purchases drain cash. Leasing spreads the cost over time.
You’ll pay more in total, but you keep cash available.
Watch for growth traps
Growth eats cash. More inventory. More receivables. More expenses.
Fast growth without financing can kill a business. Plan your cash before you grow.
Forecast cash flow
Don’t just track cash. Forecast it.
What will cash look like in 2 weeks? In a month? In a quarter?
Simple forecasting catches problems before they become crises.
Cash flow warning signs
Watch for these signals:
- Consistently paying suppliers late
- Maxing out credit lines
- Skipping owner draws to cover expenses
- Taking on debt to pay operating costs
- Unable to take supplier discounts you used to take
- Increasing days in receivables
These suggest cash flow is tightening. Act before it becomes a crisis.
Building a cash cushion
Every business needs a cash reserve. Money set aside for surprises.
How much? Start with one month of operating expenses. Work toward three months.
This cushion lets you:
- Handle slow periods
- Cover unexpected expenses
- Take advantage of opportunities
- Sleep at night
Build it gradually. Set aside a percentage of profits every month.
Tools for cash visibility
You can’t manage what you can’t see.
Cash flow forecast: A simple spreadsheet showing expected cash in and cash out for the next 12 weeks.
Aging reports: Who owes you money and how old is it.
Inventory reports: What’s sitting too long and tying up cash.
Dashboard: Real-time view of key metrics like cash position, receivables, and inventory.
Integrated software makes this easy. When inventory, sales, and accounting are connected, you see the full picture.
The bottom line
Cash flow management isn’t exciting. But it’s essential.
Watch your cash conversion cycle. Turn inventory faster. Collect receivables sooner. Manage payables wisely.
Do these things consistently and you’ll avoid the cash crunch that kills growing businesses.
Profit makes you feel good. Cash keeps you in business.
Need better visibility into your cash position? Get a demo and see how Magnofy helps distributors manage cash flow.
