Al Bates of Profit Planning Group says that one of the mantras “killing distribution” is the concept that cash is king. In the latest MDM Executive Briefing, Critical Profit Drivers in Wholesale Distribution, Bates says: “I don’t think cash is king. I think it’s a rebellious prince that should be put into exile.”
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It’s not that cash isn’t important. It’s how many distributors go about getting more of it, the author of Triple Your Profit! says.
“Most people try to drive more cash by systematically lowering their inventory and accounts receivable,” he says. So while it’s understandable why many distributors have done this – especially in a weakened economy – they must ask themselves: Why do we need cash?
“My concern is as we’ve gone through this process, we’ve reduced our inventory and accounts receivable to the point we can’t make a profit,” Bates says. If a company does not have enough inventory, it can hurt a customer relationship. Having a product in stock when it’s ordered is critical.
The same goes with accounts receivable. “The goal of accounts receivable management isn’t to lower accounts receivable – the goal is to have enough to drive more sales,” he says. (Read more about how accounts receivable can grow sales for distributors in Trade Credit Grows in Importance.)
In other words, lowering inventory and accounts receivables can be just as bad as raising them. In the end, “the way to have cash is to have a gigantic profit,” Bates says. The most successful companies have more cash, but not by cutting inventory and accounts receivable. “They got there by being a profit leader.”
Hear more about Bates’ approach to growing profitability in the below video on why he believes cash isn’t king. Watch the rest of the program on distributor profitability at www.mdm.com/executivebriefing.