Distributors, to say the least, are facing more uncertainty now than in recent memory.
In a recent MDM Webcast, Manage the Panic of 2009: New Rules for New Economic Realities," Evergreen Consulting's Brent Grover says we are now seeing the worst business conditions in his decades of work in the industry.
"Distributors are not accustomed to dealing with this uncertainty," he told participants. "Or the speed of decline in demand and prices."
Now more than ever leaders need to avoid hunkering down, and instead strategically prepare their companies for the upswing. When the downturn does reverse course, fewer companies will emerge, making it critical for distributors to hone and hold onto their competitive edge.
So how should distributors move forward while the going is still tough? According to Grover, get a firm grip on cash and the cash cycle. Avoid breaching loan covenants. And look for opportunities to buy companies at bargain prices.
Hold onto only those spending programs and capacity that will sustain you and that will build strategic capability.
One of Grover's key pieces of advice was on managing cash and avoiding cash traps in a distributor's working capital cycle, inventories, receivables, payables and in facilities.
"Cash is king," Grover said. "It always has been and always will be king."
Grover introduced 15 danger signs distributors should monitor. Among them: a 5-percent to 10-percent drop in trailing-twelve-month (TTM) sales; a 1-percent to 2-percent TTM drop in gross margin percentage; a cash flow TTM drop; credit line utilization above 80 percent; vendors' tightening terms; turnover in management and sales reps and loss of important product lines.
Most distributors will check at least a few off on this list. "My immediate concern is the banking questions on this list," Grover says.
Supplier financing is likely to tighten up, because suppliers are having their own cash flow problems. Supplier financing may also grow to be inadequate, which happens when distributor inventory swells. When this happens, distributors will turn to the bank, Grover says, which will be tough: "Banks do not want to increase available credit even to credit-worthy customers."
He homed in on what he calls the "big three of credit reporting" when dealing with banks. He said banks like 13-week or more cash flow forecasts, and a forecast that integrates the balance sheet, income statement and the borrowing base of receivables and inventory.
"You should be looking for cash crunches in your 13-week forecast and beyond using TTM data," he says. TTM involves treating each month as year-end and not relying on the last calendar year or quarterly data.
The percentage of credit line a distributor uses is critical, as well: "A large customer who fails to pay on time or at all – that quickly can eat up available capacity."
Customers and Credit
Distributors are challenged to manage the credit relationships they have with customers during this time, as well. "Sometimes we get in so deep with customers, and they owe us a lot of money; we have a lot of special stock on hand. We feel we can't afford to stop doing business with them," Grover says.
Grover recommends tightening credit limits, revisiting your policy on selling to past due accounts, reviewing hold orders, ensuring someone in the company knows what to do when a customer goes bankrupt and seeks court protection, and how to plan for preferential payment claims. Grover also says to avoid letting salespeople or others overturn your credit manager's decisions. And says there is no substitute for top management dealing personally with serious credit problems. Grover also recommended credit
Should sales people have some say in whether to extend credit to a customer? Grover says no. It's not their capital that is at risk," he says. "… They have everything to gain if a sale is processed and nothing to lose. I would leave them out of the credit process, with the exception of input if they know something that needs to be shared – good or bad – about the customer." He recommends leaving credit decisions to the credit department.
On the question of customers using credit cards, Grover says the card can have a "useful purpose." He says it's better to get paid "2.5 percent less than not at all" (referring to typical credit card processing fees).
"If it's a customer you can handle on a credit card basis, and not take on a credit risk, then it's a good idea," he says. "But I'd also be cautious if a customer is using a credit card, not because you asked him to, but on his own volition. It may mean his credit lines are tapped out, and he is running his business on his credit card."
With capital expenditures, distributors should approach spending decisions in three ways. One, is it an investment in the company's strategy, such as Internet connectivity, a stronger ERP or a private label product? If so, keep investing.
Two, is it adding to capacity? If you don't need the capacity in the foreseeable future or have excess, Grover said there is no reason to add. And three, are you replacing worn-out assets? He recommends not to unless it's "really important."
Grover's point: "Conserving cash means being very disciplined about capital expenditures." Don't stop innovating in low-risk new profit models and product ideas, but hold onto some dry powder.
The People Equation
Grover says that one of the most important parts of distributor expense control is people. Focus on A and B performers. A performers are those who if they left the business customers and fellow employees would miss them.
B performers are those that have the potential to be A performers. C players are interchangeable – they don't add a lot of value, and if D performers were gone, everybody would be glad, Grover says. They tend to be a drag on business goals. In looking at cost-cutting initiatives, do everything you can to hold onto A and B. Grover is not in favor of across-the-board salary reductions or freezes that risk losing A and B for the sake of being fair to C and D.
"The philosophy is that you're better off with a small cadre of outstanding, experienced, trained and dedicated experts than a large group of slugs."
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