Boundless Blog
September 25, 2008 by Boundless Network
ANATOMY OF A DISTRIBUTOR MELTDOWN
Musings by Jason Black | CEO, Boundless Network
The country’s economic system is in crisis
mode. Unfortunately, I believe there are some difficult times in front of all
of us, as the impact from the first wave of the cratering capital markets
trickles down to the rest of the country. Let’s face it: the government will
not be able to bail everyone out, and there are so many companies
interconnected to the banking system (capital) driven by the value of the
dollar. The dreaded question… which companies are next? How many service
providers will be impacted? How many small businesses will suffer from the
“spigot” being turned off?
That being said, we have to still run our
respective businesses in a profitable efficient manner. I think the promotional
industry will survive, but I also encourage distributorships to stay closely
attuned to their business to avert any possible catastrophes.
The question is: can a total meltdown happen
in your distributorship business? And what are the early signs and how to
prevent it? In this blog entry, I will discuss the “early signs”
distributorships should be on the alert for.
In the promotional business, your most
precious asset is your working capital. You cannot run your business without
capital and/or effective credit. I promise you, in these declining economic
times, more and more distributorships will fail because of not properly
managing their working capital to deal with a decline in their business.
Meet Billy Bob’s Promo Shop, a successful $5MM
distributor owner with eight salespeople.
1. Business has been a
little slower for Billy lately. He anticipates sales are down 15-20% for the
year. He has not reduced his overhead, hoping the economy will turn around
soon.
2. Billy Bob starts to
notice a trend with his receivables: his customers are not paying as fast as
they did last year. Last year’s receivables ranged between 30-35 days, whereas
the new trend has been between 50-60 days, increasing the DSO (days sales
outstanding) by approximately 15 days.
3. As a reactive move to
stretch out capital, Billy starts to “stretch” his suppliers beyond the 45 day
mark.
4. Salespeople continue
selling and placing orders, but they notice some new trends, like suppliers
telling them their orders are “on hold.”
5. Salespeople are
starting to get pissed at Billy for delaying their orders, and they wonder why
the heck Billy is not paying his bills. In the meantime, Billy is actively
calling customers to get faster payment but is having a tough go of things.
Billy is a becoming a one-man juggling act trying to artfully manage his
payables and receivables. Billy thought about asking customers to pre-pay, but
Billy’s salespeople told Billy to pound sand.
6. Stress for Billy
continues to build, as he is using more of his family savings and his kids’
school fund while working crazy hours and not sleeping well. Billy is taking
lots of those “pink pills.”
Then it happens: the light at the end of the
tunnel! Only this light is a fast moving train that just 1% of distributors
will be able to stop.
7. Supplier #1tells
salesperson Johnny that he needs to you need to prepay or they will refuse to
ship his order. Johnny gets Billy’s credit card, much to Billy’s chagrin.
8. Supplier after
supplier tells other members of Billy’s sales team that they must prepay. Soon
the credit card starts to hit its limit, and options for Billy and team start
to dwindle.
The Big Flip is where it all starts to crash
and burn: going from credit terms to prepay. When the flip happens, orders go
from 30-45 day terms to pre-pay (two full weeks before the order is completed),
equating to approximately 60 days. It’s a new day for Billy Bob’s Promo shop…
the proverbial death spiral. And it’s all because the working capital
requirements have spun completely out of control. Once the spin starts, it’s
darn near impossible to stop.
Before the payment request, Billy could
effectively run his business with 15-20 days of working capital (difference
between DSO and DPO). For Billy’s $5MM distributorship, his working capital
requirement was approximately $150K.
But now that all his salespeople are required
to prepay, Billy has added an additional 60 days of working capital requirement
to maintain the status quo and effectively get orders in and out of the system.
Under the new rules, imposed by Billy’s top suppliers, he is required to prepay
to reestablish credit. Ouch! Billy now needs approximately $750K to manage the
working capital of his business (not including ongoing operating expenses).
Billy is facing some tough decisions, and it doesn’t have a happy ending.
The moral of the story: keep tight controls on
your working capital. Make sure you effectively communicate with your customers
on appropriate payment terms, and proactively communicate with your suppliers
if things start to get bumpy. Don’t be a Billy!
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