How to Make Cash Flow Projections for a Distribution Based Business

Cash flow plays a prominent role in the success of any business. No business can survive if it does not have the money to pay suppliers, lenders and employees. Distribution companies, which often act as the intermediary between suppliers and manufacturers and their end users, typically have large cash flow needs. Distribution-based companies especially need to project their cash flows over different time frames to ensure they properly identify and plan for any shortages.

A distribution company, also called a distributor, is a company that buys complementary products and product lines, stores them in a warehouse or fulfillment center and resells them. Distributors may sell to retailers or directly to end users or customers. Typically, distribution companies work with a limited number of manufacturers and suppliers and tie closely into the promotional activities of those entities. They may even provide personnel, financing or similar operational support.

Working capital -- which equals current assets minus current liabilities -- provides one measure of cash flow. Projecting working capital needs serves as an accurate forecast for operational cash flow needs. Current assets include accounts receivables, cash and inventory -- a large portion of a distributor’s assets. Current liabilities include accounts payable and credit lines. But distributors can't blindly use the working capital formula to project cash flow needs. If inventory does not sell as quickly as anticipated, a distributor could have high levels of inventory and low levels of cash. Therefore, companies must determine how quickly their current assets convert to cash and factor that into their working capital projections.

A distribution company has current assets equaling $200,000: $110,000 in inventory; $60,000 in accounts receivable; and $30,000 in cash. It has current liabilities of $170,000: $100,000 in accounts payable; and $70,000 outstanding on a line of credit. Working capital therefore equals $30,000, which is $200,000 minus $170,000. However, if the inventory takes 60 days to convert to cash, and customers take 45 days to pay invoices and the accounts payable are all due in 15 days, the company could potentially experience a cash shortage of up to $70,000. The $70,000 is the accounts payable amount minus available cash.

Distribution companies should also use the cash flow statement to project cash flows by analyzing performance over several accounting periods and adding in expected changes. Distribution companies may use cash to expand or open new warehouses or make additional investments in machinery and equipment to support growth or replace old assets. The operating cash flow section may show the company running close to a break-even point due to hiring more staff for the warehouse. The company can restructure agreements with manufacturers to increase net cash flows. Otherwise, they must cover any projected shortages in investing and operating cash with financing -- new equity from owners or debt financing from lenders.