Accounts receivable

There is the following problem:

• Production requires the manufacturing of large batches in order for the cost of goods to be acceptable.
• Retail is experiencing a shortage of working capital, which is why it takes goods on consignment rather than purchasing them outright.

In such cases, it is reasonable for the manufacturer to find that the goods in their warehouse look much less appealing than those in the retailer’s warehouse. This leads to a trade-off where we exchange something of little value for non-liquid receivables.
However, a manufacturer facing fixed costs needs to maintain the production cycle, so they continue to produce their goods, simply releasing a different item. This item goes straight to the warehouse and from there to the retailer.

The manufacturer starts asking the merchant, “So where’s the money, huh?” to which the merchant shrugs widely and replies, “Well, nobody’s buying your goods—what we need is a similar robe, but with mother-of-pearl buttons.”
The manufacturer goes back to their workshop and, instead of thinking about the accounts receivable, turns on the machine and makes the same thing again, but with mother-of-pearl buttons. The merchant ends up with another item (adding to the already existing hundred) that also won’t sell well, as it simply gets lost among the entire assortment.

We experience the effect of long accounts receivable when the return of money from the merchant to the manufacturer takes six months, nine months, or even a year.
There are three factors to blame:

• wide range
• the unwillingness or inability of the producer to sell their product themselves
• the merchant’s disinterest in refunding the money
• a general mess, where the producer no longer cares who to “squeeze” money from and is simply pleased with some feeble stream of incoming cash.

However, it is clear that no matter what the merchant says, he is essentially rationalizing his lack of success in sales or simply his unwillingness to pay off debts. Listening to his arguments about “mother-of-pearl buttons“No need. When choosing between ‘pay the rent now’ or ‘return the money to the supplier,’ he will choose the first option, as he believes he can blackmail the supplier: ‘If you start causing trouble, I’ll just return your goods and won’t sell anything of yours at all.’”

Why do suppliers allow a situation where they end up in bondage to traders?
It seems that we are talking about a highly competitive market with many, or even too many, suppliers. The product is standard or conditionally standard, and traders generally don’t care whom they buy from. Given that suppliers’ warehouses are chronically overwhelmed, they dictate the terms of delivery with payment to be made “later.”

What to do? Here is a collection of recipes:

1. Do not allow “on consignment.” If you allow “on consignment,” you must clearly understand that you are taking on classic credit risks without being a professional in the financial market. Moreover, you become a typical victim of adverse selection, as those who have been denied a credit line for working capital will come to you. Consider the following solutions: a) Invite a bank that will finance your merchants. Find a forward-thinking insurance company that can provide you or your merchants with “financial risk” insurance. b) Offer supplies not “on consignment,” but with deferred payment, and c) Play with the price. Cash delivery should be cheaper than delivery with deferred payment. Additionally, the price difference should exceed the current cost of unsecured credit in the market—your risks are greater than the bank’s risks, and your “interest rate” should be higher.
2. Reorganize business processes to ensure that products are “pulled” rather than “pushed.” If you have a production facility that you’re worried about underutilizing, consider whether it might be worth selling the production. You could use the proceeds to invest in your business and place orders with other suppliers, focusing on adding value through preparing for the production process and managing relationships with vendors.
3. Don’t leave your retailers to fend for themselves. You need to be in tune with their interests, maintain constant contact, visit them, and not just listen to their excuses, but see how your product is performing, where it is physically located, and what the retailer is doing to boost sales. This way, you can quickly identify unpromising retailers and optimize your sales strategy with the promising ones. There’s a term for this: “merchandising.” 🙂
4. Develop a procedure for auditing inventory and make it a requirement for working with each merchant—specifying where, when, how, what, and why. Ideally, they should send you either a weekly sales report or arrange for each item to be accompanied by a unique label that is detached from the product upon sale and handed over to you. This way, you will be able to see the movement of your goods in real time.
5. Compare the implementation among different retailers. If one of them has an item that “isn’t selling” while another has it “selling well,” find out why. If you believe the item should be “selling,” investigate the obstacles. This can go as far as “mystery shopping.”
6. Don’t give in to the merchants. Release what you believe is necessary. If sales fail, it will be solely your fault. However, you should avoid “pearl buttons.” Merchants need to clearly understand what products to expect from you and which ones to expect from your competitors. In the end, it will be easier for them to work with you and your products. Establish a set of philosophical limitations for yourself. Let your product be defined by certain principles that can be “sold.” Limit your range to a reasonable minimum. A wide selection— not always Alright. A, B, C — the analysis and the Pareto principle are still in effect. Use these tools and don’t clutter your own or others’ warehouses and minds.
7. You can never please everyone. Imagine you’re a chef in a restaurant. There will always be a bunch of idiots who say your food is tasteless. However, in your city, there will be a couple of dozen people who love your food every day. And that’s all you need, since you only have five tables. Find your customer and your product. No one will push you out of the market, and nothing will make your accounts receivable grow. After all, ten people who crave your product are worth more than a hundred who are just wondering, “What do they sell here?”
8. Segment the receivables by terms. The “fresher” the receivables, the more effort you should put into their recovery and organizing the aforementioned procedures. Offer discounts for quick repayment of receivables. Propose support programs (promotions, BTL, point-of-sale advertising). The receivables are already there anyway. It might be worth getting less, but sooner, rather than more and later.maybelater.
9. Do not ship new products until a significant amount of the old stock has been sold. If the items are not selling with the retailer, request a return of that merchandise and send it to those retailers where it is selling.
10. Understand that there are three options for selling. a) Large retailers. They will put you in a tough position, practically depriving you of profit, but they are professionals and they take what will sell. Their shelves need to “work.” If your warehouse is full, consider hiring someone who is well-connected in this market to distribute your stock to large retailers. b) Medium and small wholesalers. This is a swamp. They are unprofessional, don’t understand what “business processes” are, they have chaos in their minds and in their accounting, they are unreasonable when it comes to debt collection, and they often don’t understand the needs of end customers and advise…mother-of-pearl buttons“They are following the market, which, in their case, is highly competitive. Dealing with receivables is the lesser of two evils. At the same time, they promise you higher earnings than large retailers.

    b) Own sales. They need to be built and developed. They are not suitable as a quick fix. This is more of a strategic decision than a tactical one. However, having your own sales channel makes you independent from traders, gives you a sense of reality rather than a set of excuses, allows you to track the entire journey and lifecycle of the product, enables you to speak the same language as wholesalers, offers greater profit, and eliminates receivables, which is the main point 🙂”

In fact, managing accounts receivable is one of the key areas of business operations, and it should be given constant attention, not just when issues arise. This requires a regular allocation of resources along with all the necessary attributes of effective work: procedures, decisions, processes, reports, responsible parties, deadlines, and incentives.