Distribution is a business where you can be growing, profitable on paper, and still run out of cash. The mechanics are straightforward: you buy product from suppliers on 30-60 day terms, sell to accounts on 30-60 day terms, and the gap between cash out and cash in has to be funded somehow. When the gaps widen — due to slow-paying accounts, over-stocked inventory, thin margins, or seasonal imbalances — that gap becomes a crisis. Here are the four most common cash flow problems in distribution and how to systematically address each one.
Problem 1: Slow Accounts Receivable Collection
What it looks like: Your DSO (days sales outstanding) is 50, 60, or 70 days on Net 30 terms. You invoice regularly, revenue looks healthy, but you're constantly short on operating cash because 45-60 days of revenue is sitting in unpaid invoices.
Why it happens: Accounts develop habits. An account that paid Net 35 last month will pay Net 37 next month and Net 40 the month after — not because they intend to be slow payers, but because no one is enforcing the terms and the drift continues unchecked. Without automated reminders and clear consequences for late payment, accounts optimize for their own cash flow at the expense of yours.
How to fix it:
- Implement automated payment reminders at day 25, 32, and 45 — before invoices go far past due
- Add a clear late payment fee (1.5%/month) to your terms and actually apply it
- Implement credit holds at 30 days past due — no new orders ship until the balance is resolved
- Offer a 1-2% early pay discount for payment within 10 days, making it easy to take advantage of via ACH or online payment
- Review AR aging weekly as a leadership discipline — not monthly
For a business doing $2M in revenue, reducing average DSO from 55 days to 38 days frees up approximately $94,000 in operating cash — the equivalent of a significant line of credit, at zero cost.
Problem 2: Over-Investment in Inventory
What it looks like: Your warehouse is full, product is moving, but you're constantly tapping your line of credit to cover operating expenses because too much capital is sitting in slow-moving SKUs.
Why it happens: Distributors buy more than they need for several reasons: taking advantage of supplier promotions (buying 6 months of supply at a discount), ordering conservatively large to avoid stockouts, and maintaining a long SKU tail of slow-moving items that represent customer requests that never materialized into significant demand.
How to fix it:
- Calculate inventory turnover by SKU — products turning fewer than 4x per year deserve scrutiny
- Establish a clear liquidation process for slow-moving inventory: promotional pricing, bundle offers to accounts, or return to supplier if your agreement permits
- Stop buying based on gut or supplier incentives — calculate actual reorder points based on lead time and average daily demand, and buy to those points rather than to intuition
- For perishables: tighter safety stock, more frequent smaller orders, supplier relationships that allow short-notice procurement
Reducing average inventory by 20% at a business carrying $400,000 in inventory frees up $80,000 in cash — money that was sitting on shelves instead of in the bank.
Problem 3: Thin Margins on High-Volume Accounts
What it looks like: Revenue is strong and growing, but net income is flat or declining. Your largest accounts are demanding — they call frequently, require customized service, have exacting delivery requirements — and the margin you're earning on them doesn't justify the cost of serving them.
Why it happens: Large accounts gain volume discounts over time through negotiation, while the cost to serve them (delivery frequency, account management time, custom invoicing requirements) increases. The result is a margin squeeze: as the account grows, their price goes down and your service cost goes up, until the account is marginally profitable or even negative after allocating all costs.
How to fix it:
- Calculate true margin per account: revenue minus COGS minus an allocation of direct serving costs (delivery, account management time, special handling)
- For accounts with clearly negative or sub-1% net margin after allocation, have a frank conversation about pricing adjustments — or make a deliberate decision that the volume relationship is worth the subsidy for strategic reasons
- Stop providing services (delivery frequency, customization, credit terms) that you're not charging for — or start charging for them
- Use volume discounts that decrease rather than increase as an account becomes more demanding (standard pricing for standard service, premium pricing for premium service requirements)
Problem 4: Seasonal Demand Mismatch
What it looks like: Cash is plentiful in peak season and extremely tight in the off-season. You're profitable on an annual basis but spend 3-4 months per year in a cash crunch that feels like the business might not survive to the next busy period.
Why it happens: Seasonal businesses have fixed operating costs (payroll, rent, insurance) that don't scale down when revenue drops. They also often over-invest in inventory before peak season (good) but carry too much labor into the slow season (bad). The cash position that looks comfortable in October is devastated by February.
How to fix it:
- Model your cash flow 6 months forward, not just current month — seasonal businesses need longer cash visibility than year-round operations
- Establish a seasonal line of credit during your high-cash period, not when you're desperate — banks lend based on your financial position, not your need
- Reduce fixed costs in the off-season: contract labor rather than full-time employees for peak-specific roles, lease flexibility for storage space
- Offer pre-season programs to accounts — a discount on orders placed and paid before the season starts, converting future revenue into current cash