When most businesses experience cash flow problems, the instinctual reaction is to focus on increasing sales. This seems logical, since the issue is rooted in the absence of cash and more sales should bring in more money to fill in the gap. But in the wholesale industry, insufficient revenue is far from the only potential catalyst for cash flow problems. Should the culprit turn out to be another element of the business, immediately trying to increase sales could do more harm than good. In the case of a recurring problem, more sales will likely provide temporary relief at best, as opposed to ensuring the same thing doesn’t happen again.
In order to locate the root cause and develop a long-term solution, you must address other elements of your business that have a direct impact on how much cash you will have on hand throughout the month. Here are three potential culprits for your wholesale business’s cash flow problems, aside from sales:
1. Elongated Business Cycle
One of the most puzzling paradoxes in the small business world is the way companies with elongated business cycles handle collections. It’s safe to say that no one actually likes having to constantly follow up with customers just to make sure they are paid on time, or even at all. The act of following up (let’s just call it what it is: nagging) is both awkward and time-consuming. But the aforementioned paradox is that the business owners who must do the most following up (wholesalers, doctors, construction contractors) appear to be especially uncomfortable with asking clients for the money they are rightfully owed.
It’s possible they simply don’t feel like they should have to devote considerable effort to collections. After all, other businesses don’t have to complete additional actions to get paid. But wholesalers make larger individual sales than other businesses and must therefore pay more attention to the cost of goods associated with each sale. Their operational expenses (monthly bills, payroll) must be met by the same date every month. You could even argue that every day your customer is late, your business is in worse shape financially than before the sale was made.
Delinquent payments cannot be offset by more sales because your cost of goods will increase on top of the money you are already missing. A more sensible solution is accounts receivable factoring, or selling the unpaid invoices to a business lender for a discount so you can be paid right away. It is then up to the business lender, or the “factor,” to collect the payment. Once the collection is made, the business lender pays you the remainder from the first sale, minus another discount. So, while you do lose a tiny amount of income, this caveat is negligible compared to the various advantages of accounts receivable factoring. You have more time in the day, and you don’t stand to lose profitability.
2. Profit Margins
Another major benefit of accounts receivable factoring is access to more reliable clients. Since the risk of cash flow gaps is so high in the wholesale industry, younger and smaller businesses cannot afford to be selective with whom they work with. Many are desperate for clients and will therefore set their prices to attract them. This might not be such a terrible idea as long as you revisit your prices later on. But as you can probably imagine, wholesalers often do not have the time or energy to examine their pricing structure every year. Their time and effort is instead devoted to making sales, even though it’s their profits that need a boost.
How to go about this? A good starting point is figuring out which customers are producing high or low profit margins. You might discover that certain clients are costing you more money than they are giving you. These are the kind of clients that deserve a raise in prices. If this is not a possibility and there’s no way for you to reduce production costs, it might be time to look into accounts receivable factoring.
3. Inefficient Operations
Since wholesalers must always keep an eye on the cost of each sale, operational spending should be as efficient as possible. The amount they spend on operational costs (staffing, equipment) must be appropriate compared to the amount of revenue these costs bring in. For some wholesalers, making their operational spending more efficient begins with securing equipment that would allow more work to get done without hiring more staff. This is why companies like United Capital Source offer equipment financing to pay for additional delivery trucks, fork lifts and other tools that would improve productivity and meet increasing levels of demand.
Unlike most other business lenders, our equipment financing terms can be customized based on your financial health and/or seasonality. Orders getting cancelled and inventory getting mismanaged are just two of countless circumstances that could destabilize a wholesaler’s finances, so we may able to adjust terms accordingly.
Once you have explored these potential culprits and taken the necessary actions, you can return your focus to sales. These issues are bound to arise again, primarily because it’s easy to lose track of things as a business grows. Should you need another round of business funding, rest assured your second business loan from United Capital Source will likely be even easier to obtain than your first. In fact, the entire small business loan process should be less complicated, now that you’ll know exactly what must be factored into your terms: your business cycle, overhead and profit margins.