Key takeaways
- Working capital is the cash tied up between paying suppliers and collecting from customers, and in distribution it is usually the largest use of money.
- Inventory days, receivable days and payable days together tell you how many days of sales the company is funding.
- Most excess stock sits in the slow-moving tail, so manage by item velocity, not by total value.
- Supplier terms, customer terms and reorder rules are all negotiable, and each one is a cash decision.
Distributors and wholesalers in BC live on thin margins and large balance sheets. The warehouse is full of cash that has been converted into product, customers take their time to pay, and suppliers want their money on terms. The gap between those dates is funded by the owner and the bank. Managing that gap is as important to profit as the margin on the goods.
Here is how we measure and improve working capital in a distribution business.
Measure the cycle in days
Three numbers describe the cycle. Inventory days is how long stock sits before it is sold, calculated from average inventory and cost of goods sold. Receivable days is how long customers take to pay, from average receivables and sales. Payable days is how long you take to pay suppliers, from average payables and purchases. Inventory days plus receivable days minus payable days is the number of days the company funds the cycle from its own cash or its line.
Calculate these monthly from the balance sheet and income statement. The trend matters more than the level, and any month where the cycle lengthens is a month where cash has gone into the balance sheet.
Manage inventory by velocity
Total inventory value hides where the problem is. Rank every item by how many days of sales are on hand. Fast movers rarely cause trouble, because they turn. The cash is tied up in the long tail of items that were bought for a customer who left, a promotion that ended or a forecast that was wrong. Review that tail monthly and decide for each item: return to supplier, sell through at a lower margin, bundle, or write it down and stop reordering.
Set reorder points and quantities by item velocity and supplier lead time, and review them each season. A reorder quantity set years ago for a product whose demand has halved is a standing order to tie up cash.
Watch for the quiet ways stock builds. Minimum order quantities from suppliers, volume discounts that reward buying more than you sell, free freight thresholds and sales promises to customers who then order less than expected all push inventory up without anyone deciding to hold more. Each is a reasonable choice on its own. Together they explain most of the long tail, so review them with purchasing when the velocity report is discussed.
Shorten receivable days
Invoice the day the goods ship, not at month end. Make terms explicit on every quote and invoice. Call before the due date on large invoices, not after. Offer card or online payment for smaller customers. Put credit limits in the system and hold orders when a customer is over the limit. Review the aging weekly and the largest overdue accounts in person. Each of these is small on its own, and together they often move receivable days meaningfully.
For customers on account, review credit limits annually against their payment history and their volume, and raise or lower them deliberately. A limit set when the customer was small is either holding back a good account or exposing you to a large one.
Use supplier terms deliberately
Supplier terms are part of the price. Ask for longer terms in exchange for volume or for consolidating purchases. Take early payment discounts only when the discount is worth more than the cost of the cash. Pay on the due date, not early by habit and not late by accident. Put every supplier's terms in the payables system so the payment run follows them automatically.
Link it to the cash forecast and the line of credit
Working capital changes flow straight into the 13-week cash forecast. A seasonal build of stock shows up as a cash outflow weeks before the sales arrive, and the forecast tells you whether the operating line covers it. Lenders who finance distributors usually size the line on receivables and inventory, so clean aging reports and a current inventory listing are also the key to having enough room when the build comes.
Numbers for the monthly review
- Inventory days, receivable days, payable days and the resulting funding gap
- Inventory value in the slow-moving tail and the action taken on it
- Past-due receivables by customer and the credit holds in place
- Fill rate or stock-outs, so cash savings are not hiding a service problem
- Gross margin by product family and by customer, because working capital decisions change mix