Fractional CFO for Distribution & Wholesale Businesses
Financial leadership for the middle of the supply chain.
Key Takeaways
- •Thin margins mean every basis point matters—pricing discipline is essential
- •Inventory is typically the largest asset—turns drive return on investment
- •Working capital management determines cash flow and growth capacity
- •Vendor relationships and terms are financial levers, not just operational
Distribution and wholesale businesses operate on thin margins with significant capital tied up in inventory. Success requires relentless focus on margin management, inventory optimization, and working capital efficiency. A CFO who understands distribution economics can identify opportunities that dramatically impact profitability.
Whether you're a general distributor, specialized wholesaler, or value-added reseller, the financial principles are similar—though application varies by industry.
Margin Management
In distribution, gross margins often range from 15-30%. When you're operating on these margins, small improvements have outsized impact on the bottom line.
The Margin Math
At 20% gross margin and 5% operating margin:
• A 1% gross margin improvement = 5% operating profit increase
• $100M revenue × 1% margin improvement = $1M to the bottom line
Margin Levers
- Pricing discipline: Ensuring list prices, discounts, and exceptions are managed tightly
- Product mix: Shifting sales toward higher-margin products
- Customer profitability: Identifying customers who consume margin (small orders, excessive service)
- Vendor negotiations: Better cost, rebates, and promotional support
- Freight optimization: Reducing inbound and outbound logistics costs
The Danger of Margin Erosion
Margin erosion often happens gradually—a discount here, a price exception there. Without tracking margin by customer, product, and order, you won't see it until it shows up in aggregate results. A CFO should establish margin tracking that catches erosion early.
Inventory Optimization
Inventory is typically the largest asset on a distributor's balance sheet. Optimizing inventory levels balances customer service with capital efficiency.
Key Inventory Metrics
- • Inventory turns by category
- • Days inventory on hand
- • Stock-out rate
- • Fill rate
- • Slow-moving % of inventory
- • Obsolete inventory reserve
GMROI: The Distribution KPI
Gross Margin Return on Inventory Investment
GMROI = Gross Profit / Average Inventory
Combines margin AND turns into one metric. Higher is better.
ABC Inventory Analysis
A items (20% of SKUs, 80% of sales): High service levels, tight inventory management
B items (30% of SKUs, 15% of sales): Moderate management attention
C items (50% of SKUs, 5% of sales): Consider eliminating or special order only
Working Capital Management
Distribution is a working capital-intensive business. The cash conversion cycle determines how much capital you need to fund operations.
Cash Conversion Cycle
CCC = Days Inventory + Days Receivables - Days Payables
Example: 45 days inventory + 40 days AR - 30 days AP = 55 day cycle
For a $50M distributor, that's ~$7.5M in working capital required
Working Capital Levers
- Reduce DIO: Faster inventory turns, better forecasting, eliminate slow movers
- Reduce DSO: Faster invoicing, better collections, appropriate credit terms
- Extend DPO: Negotiate better vendor terms (without damaging relationships)
Working Capital Funds Growth
Every dollar freed from working capital is a dollar available for growth. If you can reduce your cash conversion cycle by 10 days, that's capital freed to fund expansion, pay down debt, or improve returns to owners.
Vendor Relationships as Financial Levers
Vendor relationships aren't just operational—they're financial. Terms, rebates, and programs directly impact margins and cash flow.
Vendor Financial Elements
- Payment terms: Net 30 vs. Net 60 affects cash flow significantly
- Volume rebates: Often 1-3% of purchases—real money at scale
- Early payment discounts: 2/10 Net 30 = 36% annualized return
- Co-op and MDF: Marketing and promotional support
- Price protection: Reimbursement when costs drop
- Stock rotation: Ability to return slow-moving inventory
Rebate Tracking
Vendor rebates can represent significant margin contribution, but only if you earn and collect them. A CFO should ensure rebate programs are tracked, thresholds are achieved, and payments are collected. Unclaimed rebates are money left on the table.
Customer Profitability Analysis
Not all customers are equally profitable. Understanding customer-level profitability guides pricing, service levels, and sales focus.
Profitable Customer Profile
- • Large order sizes
- • Standard products (high turns)
- • Reasonable service demands
- • Pays on time
- • Accepts standard pricing
Margin-Draining Customer
- • Small, frequent orders
- • Special products (slow turns)
- • Excessive service demands
- • Slow payer
- • Demands special pricing
Cost to Serve
True customer profitability includes cost to serve—not just gross margin. A customer with 20% gross margin but high service costs may be less profitable than one with 18% margin and low service requirements. Allocate delivery, customer service, and returns costs to understand true profitability.
Related Resources
Distribution CFO Support
Eagle Rock CFO understands distribution economics. Let's discuss how to improve margins and optimize working capital.
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