Top 5 Things to Account for as a Distributor
Most companies in Australia rely on distributors or wholesalers to represent their business in international and local markets. This two-way trade in goods and services was worth over $735 billion in 2016–17 in Australia. This creates a vital component of Australia's economic prosperity.
Being a distributor or wholesaler is exciting as there would be lots of ups and downs. It's important for you to accurately account for purchase, inventory and sales process. As such, below we provide you 5 quick things to look out for if you are in this industry.
A small shift in customer demand creates a greater effect upstream along the supply chain, creating a bullwhip effect. This mainly happens due to fluctuating customer demand that leads to inaccurate inventory forecast. Demand forecasting is essential as it optimises cash flow, minimises inventory cost and lowering safety stock requirement. As such, if demand is overestimated, owners are left with a surplus that can cause financial drain. According to Aberdeen group, companies who can forecast their sales perform 24% better than other companies on achieving sales quota. Thus, choosing the appropriate forecasting models is vital to increase business effectiveness and efficiency.
Financials365 has forecasting functionality that is used to create anticipated demand using data of actual data from sales and production orders. You can change and edit on type of requirements to take into consideration for the forecast. Microsoft Machine learning then analyse the data and produces forecast. The screenshot below shows forecast for an item.
2. Inventory Management
After getting the right demand forecast, having the right amount of inventory could be a challenge. Distribution companies generally maintain its inventory as an asset valued at cost. However, generally accepted accounting principles require companies to value its inventory at lower cost. This is due to devaluation or breakage, especially when shipping is involved. The next step is for distributor to expand their retail network. With this, it requires excellent coordination of receiving and shipping products. Inventory management is crucial as it usually cost the most, whether it’s leasing a warehouse or purchasing a storage space. There is a trick to minimise this liability such as renting pallet space in someone else’s warehouse which could save half the usual cost.
Inventory management at company warehouses can be managed and recorded in different ways. Financials365 ensures visibility when it comes to tracking items, including how and when it was received, produced, transferred, sold or returned. You could search by either name, code, quantity and even price. This ensures that everyone in the business knows where the items are. Below is the screenshot of inventory lists and data required to input.
3. Automated Process
Distributors face constant pressure to increase efficiency and improve their process. Technology solutions can provide the automation and integration necessary to keep businesses on top of their game. Distributor with inefficient business process often deals with similar issues such as data redundancy and low customer satisfaction. With the right system automation and integration, it makes the business more flexible and accurate in managing orders, money and time. The right accounting tools and software should handle multiple locations, track real-time inventory, account for multi-currency payment and determine freight cost accurately. As such, not only it would improve distributor’s existing operation, but also position them to succeed in global economy.
No two distribution companies are alike, and each has its own unique needs. Regardless of that, one important cost that is often missed out is transportation or freight costs. Transportation is the backbone of distribution business. As a business grows, so does freight costs. Traditional accounting methods seems insufficient in breaking down the freight cost which results in underestimated cost. This imprecise estimation of freight cost impacts even more serious issues. For example, if your business is using cost-based pricing, inaccurate freight cost would impact the sales price and possibly tightening the profit margin. Together with the uncertainty of transportation cost, it is important to understand and review the pattern of freight spending in relation to sales to set a benchmark.
4. Freight Costs
Item charges or Landed Costs is available in Financials 365 and it includes inventory costs such as freight, handling, taxes and insurance, as seen on screenshot below. This cost can be assigned in a purchase document that has not been posted as fully invoiced and to partially invoiced documents.
5. Multi-Currency Transactions
Most wholesale distributors purchase or sell items in multiple currencies which exposed them to exchange rate fluctuations issues. Most businesses end up paying more than they originally expected due to translation or accounting exposure. Distributor should consider locking in an exchange rate for a period in advance such as buying a ‘forward contract’ from a bank or broker. Depending on the amount of transactions, it would be beneficial to set a foreign currency account. This would allow business owner to wait until the exchange rate is favourable.
In addition to calculating landed cost, part of Financials 365 capabilities is having multi-currency functionality in managing receivables, payables and transactions in the currencies of your choice. With this, a more accurate cost can be formulated even when you are getting goods from overseas.
These are the basics if you are looking to start a distribution business or are currently in one. For further information, Financials 365 can help you with tailored solutions will help you grow and succeed. Read more here on how we can help you and your business.