Business
Your wholesale business is growing. Why does it need more cash?
Sales growth can increase the cash committed to stock and customers before the benefit reaches the owner.
Business & Outsourced Finance
A growing wholesale business can need more cash because it buys and holds stock before collecting payment from customers. If inventory and unpaid invoices rise faster than supplier funding, the business must finance the difference—even when the additional sales are profitable.
For an established distributor, this can feel counterintuitive. The order book is stronger, customers are spending more and the warehouse is busier. Yet the overdraft stays drawn and the owner's distributions are postponed.
Start by following the cash through one order.
Measure the gap between paying and collecting
Consider when the supplier is paid, how long the goods are held and when the customer actually pays. Include deposits, freight and other costs that occur before the sale is collected.
A simplified example shows the effect. If stock sits for 60 days, customers pay 45 days after sale and suppliers are paid 30 days after purchase, the approximate cash conversion cycle is 75 days: 60 plus 45 less 30.
That is a management measure, not a complete funding calculation. Tax, freight timing, seasonality, deposits and the mix of purchases can alter the actual cash required.
The useful question is what happens to that commitment when sales increase. A growth forecast that models revenue without the stock and unpaid customer balances can understate funding needs.
Look beyond the total stock figure
A warehouse can hold too much of the wrong stock and still run short of what customers want.
Review inventory by product and age. Identify items with repeated demand, slow-moving stock, seasonal lines and goods held because a supplier's minimum order made the price attractive.
The government's inventory management guidance recommends maintaining records of quantities, costs and sales, and reviewing them regularly. For an owner, the decision is how those records change purchasing.
Ask whether order quantities match realistic sales and lead times. Include returns and damaged stock. Make sure purchasing staff can see what is already on order as well as what is on the shelf.
A lower purchase price is not automatically a better outcome if it requires a larger cash commitment to products that will sell slowly.
Understand which customers consume the most funding
A large customer can be valuable and still create a disproportionate cash requirement.
Review the margin, stock commitment, delivery pattern, credit terms and actual payment behaviour together. Include rebates, returns and other agreed costs where relevant.
Two customers with the same annual sales may contribute differently to profit and cash. One orders predictably and pays promptly; the other requires dedicated stock and pays after repeated follow-up.
The government's payment terms guidance discusses clear terms, credit checks and credit limits. Set your approach with appropriate commercial and legal advice, then monitor whether actual behaviour matches the agreement.
Assign responsibility for overdue accounts. A dispute about delivery or pricing may need an operational response before finance can collect it.
Keep margin and stock decisions connected
Reducing excess inventory can release cash, but indiscriminate discounting can damage the result. Likewise, buying less of every product can create shortages in the lines customers rely on.
Review the options product by product. You might change order quantities, negotiate a different delivery schedule, reduce the range or plan a targeted clearance.
Use the same landed-cost basis when comparing margins so the purchase price, freight and other relevant costs are treated consistently. For importers, model the effect of exchange rates and supplier payment timing rather than assuming last year's costs will repeat.
The government's pricing guidance is a useful reminder to consider both costs and customer value when reviewing prices.
Fund the remaining requirement deliberately
Better stock and debtor management may reduce the cash gap. It may not remove it, especially during a worthwhile period of growth.
Model the remaining need and discuss appropriate funding with an adviser. Consider the facility's term, repayment pattern, security, reporting obligations and headroom. A funding arrangement should suit the way the business generates cash.
Include a slower-sales scenario. Stock may remain in the warehouse longer just as customer payments slow, creating pressure from two directions.
Keep your household plans connected to the same forecast. A distribution expected from growing sales may need to stay in the business to support those sales. That trade-off should be explicit.
A useful starting point
Bring an aged stock report, aged receivables and payables, supplier terms, current orders and a sales forecast to your next review. Those records can reveal where the growth is consuming cash.
What is a good stock-turnover target? It depends on the product range, lead times, seasonality and service commitments. Start with meaningful categories and your own history rather than applying one ratio across the warehouse.
Should we borrow to buy more stock? Assess the demand, margin, timing and downside first. Finance can support sound growth, but it does not make slow-moving stock more saleable.
If growth is increasing the pressure on cash, talk with EFS. We can connect business advisory, outsourced finance support and the owner's financial position around a clearer working capital plan.
General information only. Obtain advice on your business, finance and contractual circumstances before acting.
Speak with our team
For advice on your circumstances, speak with David Rosenthal or Dion Spice.