Cash flow is critical for wholesale businesses. When you have it, you can pay bills, purchase stock and grow the business…but when you don’t, you can only survive for so long.
In fact, cash flow issues contribute to 82% of business failures. This is particularly relevant among wholesale businesses that can have a lot of money tied up in inventory, which is a big risk to cash flow.
What is cash flow?
Cash flow refers to money that comes in and goes out of your business. Plainly, in order to stay afloat, businesses need to have enough money to cover their outgoings – not only expenses, but loan repayments, purchasing stock and investments that enable the business to grow.
In an ideal business cash flow scenario, a business can cover these outgoings from its income alone. Businesses can also use other forms of cash, such as owner investment or a loan, but these alternatives can only last so long.
For small businesses, cash flow management should be a leading priority in order to survive and thrive.
Typical wholesale cash flow situation
By their nature, wholesale businesses can struggle to achieve positive cash flow.
Consider how wholesalers typically operate:
Businesses purchase inventory in advance before it’s delivered. Inventory may take a few days to be shipped, or it may take up to a couple of months if it’s coming from overseas. International stock may also take time to be processed.
Goods are often then warehoused for a period of time. When they’re eventually sold, they’re sent to customers before they’re paid for.
An invoice is sent shortly after the goods are shipped, and customers usually have 30 days to pay. Some customers invariably fail to pay their invoices on time, and it can take some chasing to secure payment.
All up, it can take many months from a wholesale business first purchasing items until they’re paid for them, and they earn a profit. During that time, the business needs to have the cash reserves to cover overheads, expenses and any other outgoings that are due.
Most common cash flow challenges for wholesale businesses
Looking at the example above, it’s clear to see how managing cash flow in the wholesale sector can be a challenge. There are a range of barriers to positive cash flow, many of which are sector specific:
- Excess inventory. While selling stock is ultimately how you make money, carrying excess inventory that doesn’t sell just represents an expense that takes away from the cash you have on hand.
Even if stock does sell, you still need the cash to be able to cover expenses in the time between purchasing the inventory and a customer paying for it.
- Late invoice payment/bad debts. Relying on invoicing to earn money is typically very reliable, but there will always be some customers who don’t pay their invoices when they’re due. This means even more time covering outgoings with your own money. If customers end up being unable to pay their debts, then you’re left out of pocket.
- High overheads. Wholesalers are often labour-intensive businesses with high staff costs. They can also have a significant amount of office or warehousing space, which means paying for power and utilities on top of rent or mortgage repayments.
- Dodgy sales projections. Overestimating sales forecasts means you don’t end up with the money you thought you would, and need to be able to cover bills another way.
- Low profit margins. If goods are priced too low, even if they sell well, it means there’s less excess cash than there could be.
Closing the cash flow gap
So how can you close the gap between the time you pay for goods and the time customers pay for them?
Many operators use a form of bank loan, such as a cash flow loan or overdraft, in order to finance overheads. Invoice financing can be used on its own, or often as well as a loan, to keep debt down.
Invoice financing works by replicating the effect of a customer paying their balance immediately. A specific invoice financing service loans the value of an invoice, and the lending is automatically repaid (plus a small fee) when the customer pays the invoice.
Wholesalers can also take advantage of supply chain finance or trade finance – both of which are common in the industry, but lesser known in other sectors.
Supply chain finance is a form of borrowing based on the invoices you owe suppliers. It’s a form of short term credit that gives businesses more time to pay their debts.
Trade finance is for businesses that deal across borders. Lenders provide payment to exporters on behalf of wholesale importers, who are able to pay back the borrowing over a longer period of time.
Strategies to improve cash flow for manufacturers and wholesalers
Improving cash flow can be done in a range of ways, from making more money to simply making adjustments to the way you run your wholesale business.
Cash flow forecasting
One of the best ways to improve short term cash flow is to spend time projecting your likely income and outgoings. Forecasting is a highly effective cash flow system because it allows business owners to make more informed financial decisions.
For example, if you can see that sales tend to drop slightly in July, you’ll know to reduce spending in June so you have money on hand to cover your outgoings during the quieter period. Or, you can launch a promotion to increase your July earnings.
A good invoicing process doesn’t impact your bottom line, but it can do wonders for your cash flow.
There are a range of ways you can do this:
- Invoice promptly after shipping goods. The sooner you invoice, the sooner you’ll get paid.
- Reduce your payment terms so they’re due sooner.
- Allow customers to pay invoices via multiple payment methods.
- Offer an early payment discount, or charge late fees on overdue invoices.
Read more: Wholesale checklist for positive cash flow
Streamline business processes
Making your business more efficient means reducing needless costs. Don’t just focus on cutting expenses, but look at tasks that could be done quicker – time is money too.
Start by looking at common jobs that take the most time. By finding efficiencies in these tasks, you’ll create the biggest impact for the business.
The best cash flow businesses utilise technology and automation as much as possible, which are one-off investments that can slash labour costs.
Implement smarter inventory control
This is related to the previous point, in that inventory control can now be automated to reduce the time it takes for staff to manually monitor stock and re-order new goods.
Analyse optimal stock levels and rethink the point at which you order replacement inventory. Ensure you have the right stock in the right quantities at the right times.
Expand your market
Identifying new markets or business opportunities is an extremely effective way to increase revenue, profit and cash flow.
Finding a new audience, be it geographically or demographically, can provide a fast cash injection as it doesn’t require fundamental changes to the way you already do things.
You may be able to expand your product offering, which has huge potential, but will require investment before it bears fruit.
Maintaining a cash reserve
All businesses go through ups and downs, and having money tucked away in the bank is your safety net for the quiet times. Know how long you can operate with your current levels of cash, and have a minimum threshold of money that you always have on hand.
Knowing how challenging it can be to achieve positive cash flow as a wholesale business, one of the best things you can do is make cash flow a key consideration in business decisions.
Being mindful of the impact of certain activities on cash flow can go a long way to preventing trouble.
You can also plan ahead by getting yourself set up for invoice financing with FundTap. Unlike other invoice financing providers, FundTap provides flexibility by allowing businesses to pick and choose when they use it. There are no regular fees or obligation to use it if you don’t need to, but it’s an umbrella you can put up on a rainy day.
With an account set up, you can get positive cash flow through invoice financing on demand. It’s as simple as submitting an invoice for funding, and you can be paid the same day.
Find out more about how FundTap works, and how it can boost your wholesale business’ cash flow today.
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