If your distributorship is in debt – for whatever reason – industry consultant Rosalie Marcus believes you should face the problem immediately and aggressively. “A lot of times, small business owners just get in the habit of just doing things a certain way – but maybe that way isn’t profitable for us,” says Marcus, the founder of Promobizcoach.com.
Making a detailed game plan is a good first step in getting out of the red, experts say. Part of that strategy, though, may mean stepping back in order to move forward. “Being able to look at the way you did business in 2013 – what worked, what your most profitable clients and categories were, who were the suppliers that were easiest to work with and what you made the highest profit margin with – all those things can help you make a huge difference and get out of the debt trend,” Marcus says.
As you look closer at your recent financials, Marcus suggests first making sure you’re not falling into this common trap: believing that high-volume orders will equal high-profit orders.
“A lot of times, distributors say, ‘Oh this is a $10,000 order,’ but a $10,000 order at a 10% profit margin isn’t always as good as a $5,000 order at a 50% profit margin,” she says.
While performing this type of examination, Marsha Londe, CEO of firm Tango Partners, recommends trying to identify potential areas for growth with current clientele as a debt solution.
“If the company is capable of purchasing products for various reasons, try to expand the contact list with that client,” she says. “Don’t wait for your contact to call another division or buyer. Ask for a reference, then source and seek additional contacts, approach them and tell them X will provide a reference about quality and service. Do the legwork yourself and don’t wait or rely on someone else to put your needs into their schedule.”
Monitor a Profit-and-Loss Statement
Marcus says one of the most common reasons that distributors accrue debt is they simply don’t have a firm grasp of what they’re spending and what they’re bringing in. That’s where taking the basic step of creating and closely monitoring a profit-and-loss statement can be hugely beneficial.
“A lot of times, we lose sight of where our money is going, and there are a lot of little expenses that creep up,” she says. “So definitely look at your profit-and-loss statements every month.”
Keeping close tabs on this statement could reveal areas in which you may be able to trim or eliminate recurring costs. “You may be able to get better pricing on office supplies if you buy them in bulk or order them in person,” Marcus says.
Marcus believes thinking longer-term can also help you get out of debt. “Look at what your monthly expenses are. A lot of times, if you pay your expenses yearly instead of monthly, they give you a significant discount,” she says. “Those things can make a difference in your business.”
Conduct a Self-Audit
Another good debt-reduction idea, according to Londe, is to review your order-fulfillment process. “Every touch on an order affects profitability,” she says. “Look for ways to eliminate touches without eliminating service, quality, accuracy and delivery.”
For example, Londe suggests taking a closer look at your proofing process. “A proof is an important part of the process – the cheapest insurance a distributor can have,” she says. “But if the order isn’t entered correctly from the start, then multiple contacts with the factory ensue, and time spent chasing down the error is time lost for selling and improving the business.”
Start Asking for Deposits
One of the top ways to break free of debt, especially racked up on credit cards, is to secure deposits for your orders, Marcus says. “A lot of distributors think asking for a deposit is going to make you look small-time, but it actually makes them look like smart businesspeople,” she says. “If someone was putting in a new kitchen in your home or doing any kind of construction, they’d ask for a deposit before they started the work. So, why shouldn’t the distributor ask for a deposit for custom work?”
Marcus says the best time to ask for a deposit is after the proof is approved by the client. “If they’re really profitable and they pay within 30 days, you may not have to have that,” she says. “But let’s say you have a client that you don’t want to let go of, but they’ve been paying in 60 days, and now they’re stretching it out and it’s more like 75 days, and your profit margins are shrinking. You can tell them you’ve reviewed your financials with your accountant, you have a new policy for 2014 and you hope they understand.”
Be Proactive and Honest
When you find yourself in debt, scaling back the number of suppliers you work with in the short-term can help you to get back into the black more quickly, Marcus says. “Maybe have two or three suppliers in each of the top-selling categories, because you’re going to get better pricing and better service, and ultimately make more money,” says Marcus.
And if your supplier partners are trying to collect from you on past-due payments, Marcus says facing the situation head-on, rather than ignoring their phone calls, is the best course of action.
“I think the most important thing is to communicate clearly,” she says. “If you owe a supplier a large amount of money, rather than not communicate with them, maybe say, ‘We’re definitely going to pay this, but we’re going to send you 75% of it now and another 25% in two weeks.’ Let them know that you intend to pay and this is what you can do, rather than run away from it.”
Marcus says that same strategy applies to creditors seeking to collect on past-due credit-card bills. “Tell them what you can do and let them know that you are honorable,” she says.