What You Should Know Before Starting a Wholesale Distribution Business

Cardboard boxes on conveyor belt in warehouse
Wholesale is basically the middleman function performed by a wholesale distributor. The end users are customers and the supply chain begins with the manufacturer on one end of the channel. Wholesale trade is also a major contributor to the country’s GDP (Gross Domestic Product). Before you become a part of this industry, it is essential to ensure factors that will be discussed in the paragraphs that follow. Other than a keen salesmanship, a wholesaler is required to understand how to operate with efficiency and ensure that profit margins do not thin out in the process of trying to keep both the manufacturers and customers happy.

Credit Management

Before you start a wholesale distribution business, you must understand the need to manage both receivables as well as payables. In wholesale, in order to maintain creditworthiness, management of receivables is the key to success. Unless the amount owed by customers has been paid, suppliers/manufacturers will be delayed and, thus, supplier relationships will languish over time. Therefore, to keep both relationships in balance, you must be able to synchronize the two parties. This may be successfully done by implementing credit limits for each customer during the bookkeeping process. Moreover, do not extend their debtor days beyond the due time period on unnecessary requests. Get all customers on board regarding the standard debtor’s day policy and ensure that each customer is aware of the ‘no-exception’ policy in advance. As for the suppliers/manufacturers, make sure that all suppliers are paid within the provided time period and flexible days must be negotiated prior to getting them on board. A good sync between the two parties will ensure a seamless functioning of your wholesale distribution business, which will be able to keep its creditworthiness intact.

Cost and Funds Planning

For any and all wholesale distribution businesses, the largest cost factor to consider is inventory cost. This cost is then followed by payroll, maintenance, equipment, and procurement cost heads. Before you start your wholesale distribution business, make sure these cost heads are meticulously sorted in order to avoid any last minute surprises. It is recommended that sufficient capital requirements are estimated prior to going on board. This initial capital will include the cost of inventory as a major cost as wholesale is solely dependent on inventory. Before you start a wholesale distribution business, you must have an accurate estimation of these costs in order to secure funds to initiate the venture. As for funding the business, personal savings may be the initial go-to for any start-up, but other sources of financing need to be secured in order to bring in huge inventories. The main product for any wholesale distribution business is inventory, without which the set-up is useless. Secure funds even through informal sources such as family or friends to begin with. Formal channels such as bank loans, hybrid securities, trade credit, crowdfunding, etc. may eventually be approached at a later stage.

Contingencies and Backups

As previously mentioned, inventory is the most crucial of costs. It is also the main product that wholesale distributors must procure. Without this procurement, operations may never commence. Therefore, before you start your own wholesale distribution business, you must plan for unforeseen delays and uncertainties in regards to inventory to ensure minimum lost orders. Lost sales are not a very healthy sign for a newly established business. It usually gives a bad first impression to customers. In order to ensure honoring your sale obligations, backups and contingencies must be set to ensure seamless operations during a shortage or unnecessary delays from suppliers. Lost sales are just one phenomenon; customer satisfaction is yet another. In order to keep customer satisfaction at par, inventory may be kept aside for use during shortages and delays, depending on the nature of the product, of course.

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