How Wholesale Businesses Can Effectively Manage Cash Flow

As a wholesaler, cash flow is the lifeblood of your business. Positive cash flow allows you to run your operations smoothly, pay the bills, meet customer demands, and reinvest back into the business for growth. So knowing that cash is king, how can you manage it better? 

While it’s true that all businesses need to keep their cash flow positive and ensure they don’t run out of money at an inconvenient time, for wholesalers, good cash flow management is central to their profitability and effectiveness as an enterprise. 

As B2B operators, the time-lapse between paying for goods from local or overseas suppliers and actually getting paid following delivery to your customers is likely measured in months. Bridging this gap is, therefore, a key business funding issue. 

Typical Wholesale Cash Flow Situation

Let’s imagine that an Australian wholesaler buys a mixture of domestic and foreign products. The foreign goods must be paid for in advance (on BOL), and then it would take circa 30 days to arrive. 

Goods then sit in the warehouse for an average of 60 days, but even when they are sold, the wholesaler’s clients (debtors) generally do not pay their invoices for a further 30-60+ days after delivery. Some take even longer than that when they are having cash flow problems of their own. 

Even for those wholesalers that manage to deliver the imported goods directly to their customers (debtors) after arrival into Australia (and invoice them immediately), the clients (debtors) will still generally not pay their invoices for a further 30-60+ days after delivery. 

So for imports, it can be as much as four to six months before an investment in supplies pays off. 

For the domestic sourced goods the wholesaler has to pay for the good anywhere from on-delivery to usually 30 days EOM, but by the time wholesaler then sells the products to their customers (debtors), the timing and hence funding gap is usually two to three months. 

Can the Gap Be Cut?

Alongside its overheads, the cash flow gap of up to six months is the big funding issue for a wholesaler like the one outlined above. That money it pays out on supplies long before they can be invoiced has to come from somewhere, and whatever business funding you chose, it will have to be paid for. 

Therefore, a key skill of many owners and chief financial officers in the wholesale sector is to manage inventory carefully. The lower the lead times on orders and the less time goods spend in the warehouse, the smaller the company’s need for funding. Some have borrowed Just-In-Time (JIT) methods from manufacturing — now backed with suitable technology — to bring warehousing times down to a matter of days. That isn’t possible in every subsector of wholesaling, though. Especially when one takes into account shipping and customs clearance times.

At the same time, those late payers also cause a problem. Tracking invoices and chasing up those that are overdue will help, as will enforcing strict terms and conditions for payments. A cash flow gap will likely still remain, however.

How Can Wholesale Businesses Close the Gap?

High-margin B2B businesses can sometimes finance this gap entirely out of their own funds — but for wholesalers, that’s unlikely to be the case. Some, trading primarily domestically and with a smaller capital requirement, may rely on a business overdraft. Others will have a business loan, which can be renewed every year or two to reflect the size of the funding requirement. 

Alongside these very traditional business funding options are a series of agile solutions that make the most of the assets a wholesaler has to secure money at a more reasonable cost: supply chain finance, invoice finance, and trade finance fall into this category.

These three business funding methods are ideal for wholesalers, but are not as well known within the Australian business community. All are tied intrinsically to the current state of trading of a business (not your past profitability), and this means you will never be left short of funds while you wait for new terms to be arranged with a bank.

Invoice finance, which raises funds against the value of accounts receivable, will not only be an ideal way to cover the funding gap between delivery and payment by your customers (debtors), it will also serve to neutralise the danger of late payments, which can play havoc with other business funding models that could lead to a breach of a lending covenant (if a bank loan is in place). A funding solution with trade credit insurance will also eliminate the risk of lost revenue in the event that a customer doesn’t pay an invoice due to their insolvency.

On the other side of the business, supply chain finance ensures domestic suppliers are paid early, which allows them to improve their cash flow situation and use the cash to finance investments, thanks to the early payment discounts offered. 

Wholesalers who buy from abroad may already be familiar with trade finance — sometimes called import finance — because of the many advantages it offers to importers. It ensures you capture the best exchange rate on the day of payment and minimises other risks whilst allowing you to never miss a deal, knowing that funds are available for purchases in order to get things moving.

By accessing cash to pay your supplies on the one hand and your outstanding invoices on the other, that cash flow gap can be reduced from months to just days, at very affordable rates (this can even sometimes work out at zero cost due to the offset you can capture from the discounts you get from your suppliers for paying them upfront). 

With modern fintech companies like OptiPay, it’s never been easier to arrange and manage these cash flow funding solutions. Find out more on how OptiPay can be your partner for growth.  

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