Wholesale Beverage DSD Routes
By Elliott Hirsh 7/30/09 email@example.com
You made the decision to get into the glamorous beverage distribution business for whatever reason. On paper, you get rich by building a customer base to whom you can sell more and more products increasing your gross sales while efficiently covering the costs to service these customers either through a pre-sell or driver sales situation.
A pre-sell situation is one in which a salesperson calls on each account on a regular schedule in a contiguous area, gets orders for items already being sold by the account, shows and sells in new products, write up the order on some type of order form that will then be used to enter the order into a computerized route management or order entry system, or the form is a multipart form which will be used to price up the order and a copy given to the customer by the driver when the order is delivered. Other parts of the form will then be brought back to the office with the money collected by the driver and used to tally up the sales and another copy used to prepare the salesperson's commission statement. There are many hand held route management/order entry systems that run off of pocket PC's or PDA's which allow the salesperson to tap in the order and then the days work can be downloaded into the computer system at the office by cable, or infrared connection or through the internet.
If you have two salespeople working two adjacent areas, you want to get all the orders into the computer so you can pick the merchandise for both sets of orders, load them on one truck, print out invoices to be used by the driver, print out a manifest of all the orders and the total cases and amounts of all the orders and somehow "route" the deliveries so the driver can efficiently make all the deliveries to the accounts and return to the warehouse at a reasonable time. You need to know when stores are open and close, when they don't want deliveries (not a lunch time, not after 3pm, deliver between 9 and 11, closed on Mondays, etc.) Otherwise, the driver will make a wasted trip or will just have to make a second attempt to deliver the order. If an order is not delivered, the customer is pissed off and you have just made $0 on the order because you are going to have to pay all the costs to get the order delivered again which is about $10 based on the cost of the driver, truck, insurance, gas, handling the merchandise again. So, the salesperson must get details about the account so it can put put into the computer under "comments": which can be printed on the invoice every time.
When the driver is ready to take the loaded truck out, you need to check the truck inventory against a "load ticket". Someone responsible needs to do this with the driver to make sure everything is loaded on the truck, because the driver is either responsible for the merchandise or the money when he returns to the warehouse. When the driver returns, he needs to have copies of the invoices, cash or signed charge receipts, undelivered invoices with a reason written on the invoice as to why it was undelivered, refused orders. Any cases on the truck need to be checked in and separated into 1) orders to be delivered again asap 2)merchandise to be put back into inventory 3) breakage which is either to be discarded or "reworked in a breakage area"
If you are starting as a one man operation and you trust yourself, there are many ways to shortcut this process, but as soon as you have employees handling YOUR merchandise and cash, you better have some serious controls otherwise you will be find yourself on the short end of the stick and be a victim of the "beverage thieves".
The driver can count the cash, write the amount on an envelope, deposit the envelop in a drop safe and then have someone in the office count the money and "settle the load" the next day. Depends on how late you want people there to wait for the driver to return from the route. It's also possible to set up a night deposit situation at a bank and have the driver deposit the cash directly into the bank, but then you have to wait a day or two until the bank confirms the cash deposit. You can also have the driver physically go to a branch of the bank you use and deposit the cash with a deposit slip you give him and then he will bring you the bank deposit slip.
So that's how a pre-sell sales situation works.
Samples of Sales Invoices
New Account Information Sheet
Manual Route Book Page
Sample Leave behind sheet
Pick Ticket to Summarize Orders and Load Truck
Daily Driver Settlement Sheet
This is easy to do if you already have customers on the books and you have a small number of products you sell them already and don't need super sales skills. You see them in the c-stores playing with their pies and cakes and in the supermarket standing in front of the Pepsi display or dragging in two cases of Red Bull into the Seven Eleven or two jugs of water over their shoulders bringing it to the law office.
The delivery truck is loaded up based on either a sales history for the route, a lucky guess, the capacity of the vehicle or the horoscope of the driver. There is a load ticket against which the driver and a supervisor checks and signs off on. The driver services "his Monday route" which is already set up with stops in order and away he goes. The driver gets to the first stop and goes into the store. There he checks the cooler, the display, the back room and then asks the big question to the buyer "You DON'T needs anything today do yah? Or maybe they will tally up what hey think the store needs and tell the buyer he needs X of #1 and Y of #2. The driver goes out to the truck, brings the merchandise into the store, gets checked in by someone at the store who will sign the invoice either as a charge or else OK the receipt of the merchandise and someone else will pay the driver out of the register or pull a wad of cash out of their sock. The driver goes to the next account and this is repeated until he finished the "route" and returns to the warehouse with cash, charge slips and merchandise. This need to be settled up as described above.
Route drivers usually get a base salary and a commission which is really piece work compensation because they really don't sell anything-they fill up empty spaces for something the store needs to replenish. Route drivers for the most part can't sell. It's a different skill set. Some of them can be trained to be more customer friendly and if you structure an incentive to present a sample and sell sheet to each of their customers for a new product, some of them will be successful in selling in a new flavor or a product line extension. They are not good at handling rejection or dealing with sales objections. They drive safely, can find the stops, understand the quirks at each stop to make the deliveries, the don't beat up the truck or the merchandise (breakage), they don't pencil whip you or the customer, they are neat and clean, they are friendly, they don;t mind the schlepping (lifting). They are are vital part of the sales and delivery effort.
Usually not an effective way to open accounts. If you get the decision maker on the phone and they are interested, they will want to see a salesman. In one day you make 50 calls and 32 people say send a salesman. You think you've saved time by not making cold calls in person and you have 2 interested buyers. Someone could make 10-15 calls an hour, but it's too easy to have someone say "he's not here, he's busy, call back after lunch, we only sell Pepsi, no juice, no room, the boss lives in Japip. etc. If the cold calls were made in person, a salesperson can gather a lot of information, clues etc about the account, access the "hotness of the account" (potential for volume or appropriateness of the product), see what they are selling now, get the owners name and ethnicity, pick up menus, obtain fax numbers (for future fax'd promotions) and might even see the decision maker and make a presentation and get an order. Telemarketing works if you have a hot brand name product or you have an established customers who is expecting a call to "get his order" for a specific scheduled delivery day. "This is Sally and I'm calling from Amazing Beverages to get your order for delivery for this Thursday") If the telemarketing person has build rapport with the buyer, they may be able to upsell or introduce a new product or line extension or flavor to this buyer and "add a case or two onto an order". ("Would you like to hear about a new product we started to sell?" Can I tell you about our specials?")
You basically have to load a cooler with samples, ice them down, get some 3 oz bathroom cups, put together some type of presentation book with prices, have an order form in your pocket and hit the streets expecting to walk into 25 places with the prospects of getting 3 new customers out of this effort, identifying 6 places to call back and make a second presentation, be turned away at 6 and 6 more where the decision maker wasn't there, but you assessed whether there's potential at the account or it's a dump that's likely to go out of business. Some dumps sell a lot of beverages. This is what can not be done on the phone. Read this for more information on how to sell beverages up and down the streets.
Selling Beverages Up and Down the Street
Account Development Strategy
Obtain list of prospective stores in your area with phone numbers and owners names.
Where and how to to start
Start by getting a map from AAA or buy a 50 mile radius map of your area. Put a dot or star indicating your warehouse location. Get a compass with a sharpie and draw 4 circles spaced to scale about 25 miles from this dot. Divide the outside circle into 5 sections. Draw a 5 pointed star with pencil and where the points hit the outer circle, connect these points on the circle to the center dot. Now you have 5 route days M Tu W Th Fr and 4 sections ranging close in to the warehouse to 25 miles away in the outer most section. There's your plan. I call it the concentric circle plan.
Start with one day the first week and stay within the first ring of that sector. The next day you work the first ring of the adjacent sector-either direction-pick one. The third day, the next. STAY WITHIN THE FIRST RING.
Sell for 4 days, then make the deliveries to the 8-10 accounts you sold the first 4 days. While you are out making these first deliveries, plan to make call backs on the accounts you identified as having potential or accounts where the owner was too busy to see you. Try to get an opening order for delivery the next time you are working that sector but you want to get it there in a reasonable time so "buyers remorse" doesn't kick in and they refuse the order when you make the delivery because they "changed their mind"
The next selling day start with the sector you have not sold in yet. The next day, you should be working in the Monday area (the first sector) but in ring two...further away from the warehouse, but accessible to the customers you sold in the first ring and prospects you can call back on in the first ring. Remember the second ring of the sector has more area to cover and likely more prospective accounts.
Do you understand how this works!
Eventually, you will have covered the entire 25 mile radius and have been into EVERY possible account. These locations are either customers, likely to buy something in the future, personality disordered people you will never be able to sell or satisfy if you sold them, locations that are closed, should close or just have zero potential, accounts who have turned you down after FIVE attempts. A 25 mile radius is 78 square miles-this is a lot of territory. The further out you go to service accounts, the more you will spend on fuel and time.
By following this plan, you are not driving all over God's Earth making 2 case deliveries and can put accounts into serviceable routes for pre-sell order taking and have accounts in adjacent areas whose orders can be consolidated on one delivery truck which is staying in close proximity to each other allowing the driver to drive to and service the maximum number of accounts with the minimum distance between them for time and truck operating cost consideration.
IF YOU HAVE ENOUGH CAPITAL TO START WITH TWO SALESPEOPLE
If you are not starting on shoe string, I'd split each sector of the map in half and put one salesman in each half on the same ring and the same day. In this way you will build up you account base twice as fast with accounts being opened up close to each other. Somewhere, though, you will have to divvy up the accounts so one 200-250 account route is serviced by each salesperson without tripping over each other. And there may come a time when the accounts in the outlying rings will have to be reassigned to more than one salesperson because the area is so much larger. Really depends on how dense the area is and how much driving there is between accounts.
Believe me there are times when customers get deliveries when they need or want them. You might have to go out of the way, or throw cases into a car and drive them there yourself to satisfy a customer, but you are trying to build your business quickly so you have cash flow to pay the bills, pay yourself and start to hire employees to service established customers while you continue to grow the account base, look for more products to sell into this account base and build a reputation for service and dependability.
If your route servicing turn into chaos, you will start to lose customers and competitors whom you displaced to get your products into the account, will regain sales of their products and eventually the account will give up on you altogether.
You don't have to service the accounts weekly. Most accounts are happy with bi-weekly service and in some cases a phone call (telemarketing) will suffice to find out what they need or want, but someone should see the customer face-to face at least once a month. Little chachkas (pens, magnets, hats, tee shirts, calendars, fly swatters and other business promotional items) given to the decision maker will help form a tighter relationship with your salesperson and the buyer. You want to shift your sales effort to relationship selling so the salesperson can introduce new lines to his customers and they will readily "try it" and add these items onto their order.
One salesman should be able to maintain an account base of 200-300 customers that they see every other week. 150 customers seen weekly is 30 calls a day. Physical calls not phone calls. It's 15 calls in the morning before lunch and 15 calls in the afternoon after lunch. There are some accounts that are not driven by a "lunch business" and you may be able to squeeze in a couple of calls between 11:30 am and 1:30 pm. There will be account attrition shown by accounts not buying anything within a months time. Before I give up on them and delete them from the system, I'd send a sales manager out to see the account or at least make a phone call as to why the account hasn't ordered in 30 days. When you get an answer like "I haven't seen a salesperson", it's time to make some changes.
Develop the area around a base of chain accounts
If you started this business and were given a list of accounts to service spread all over your territory, you need to modify this plan so you can service these existing accounts while you detail each area around each of these accounts. This enables you to service the core business while you develop tight clusters of accounts near and around each of the existing stops. There are place to call on across the street, down the road and between stops. You need to map these existing accounts and draw a circle around each of them and work each circle until you have seen every possible account within the circle and the circles butt up to each other. As the account base grows, you need to reroute everything in order to service all your customers with some degree of efficiency.
Compensation of Salespeople
The worst way: hourly. You think they are out there working 60 minutes an hour and they "make calls" and "get no orders". At the end of the day or week, they have calculated how many hours, minutes and seconds you owe them for plus every quarter they put in the parking meters. We had a distributor who hired sales people on this basis and they folded. There is NO incentive to hang in there and persuade the buyer to give them an order.
The best way: straight commission. The reality is you likely have to give them a base, some type of car allowance, maybe health insurance, but the bulk of their compensation needs to be commission. This is the only incentive they have to stop into that account or potential account, bring in samples, get to the decision maker, make a pitch, ask for the order. If you pay order takers commission, it basically piece work and I've seen beverage companies compensate salespeople with 80% salary and 20% commission. So you want waitresses who take early bird special orders or waitresses who can sell a table full of people 4 pieces of cheese cake when they are plum full and look ready to puke ? Do you want a bartender who can pour $1 drafts for happy hour or someone who can suggest a plateful of wings for $5 to go with the no-profit $1 beer?
Remember the cost structure in the first section? Whatever you pay the salesperson plus any expenses you reimburse them can not exceed 1/3rd the gross profit. So if you are working on $3/case, you have a buck to cover the sales expenses. If you use 50 cents commission over a base salary, payroll expenses, car expenses, computer expenses you have to figure out what the gross salary needs to be. You might offer a $50/day plus 50 cents a case commission, plus $25-30 a day car allowance. What happens if you gross profit is only $2.00 per case. They you have to establish some type of variable commission or base the commission on the gross profit per case. Most route management system allow you to set up commission schedules based on each product's gross profit, a % of the selling price or a flat amount per case. And some allow you to put in commissions for 2 people. One the salesperson and the second would be a commission override for a sales manager.
The problem with straight commission is that fewer people will take the job, especially if you are a start-up because they have to build up the area and that may take a few months until you get through the initial sales and the repeat sales kick in so the dollar volume gets to the level where they can make a reasonable amount of commission and a living. One way to address this is to pay a base salary for 10 weeks with a commission on top of that and then after a certain level of sales is achieved, the base (which is generally not repaid because it is a salary) becomes a commission "draw" against commissions. So someone is selling $3000 dollars of product at 8% commission generating $240 a week in commissions. You can pay them $250 a week draw (not enough to hold someone's interest) or you could pay them a base salary of $200 a week plus 8% commissions on everything over $2500 in sales. If they sell $5000 worth of product a week, they get $200 base + $240 commissions (8% over $2500) If you want to include auto expenses (auto allowance, gas, tolls, parking )in the sales compensation, try this formula: $250 base + $150 auto allowance + 8% commission on everything over $4400. Simply add the advances together and divide by .08 and that is the break even sales amount needed to be written and delivered by the sales rep. If you pay the sales person say $600 a week plus give them $100 for the use of their car (not sufficient) and you give a single person medical insurance at $500 a month (for a single person-not couple or family), you are spending with payroll costs (FICA, unemployment, workman's compensation), you will be laying out $800 a week and this requires them to sell $10,000 a week @ 8% commission (1/3rd of the total gross profit). If they sell $4000 a week, they are $6000 a week in sales short and you will be using all of the $320 of your share of the gross profit plus you will be using $160 in working capital to subsidize this non-performing salesperson. Actually it will be higher because your 1/3rd of the gross profit goes to pay the warehouse and office overhead.
Does a poor performing salesperson average out the ones on target? You have 3 salespeople. The sales are $4000, $7000 and $10000 a week. You pay each of the the same- salary, commissions, payroll expenses, auto expenses and medical insurance for one person. Your outlay for sales expense for the week is, but at 24% gross profit, you have $1680 budgeted for sales based at 8% or $2100 at 10%, but these three salespeople are costing you $1800 a week (based on $600/week salary or combination of base plus commissions) + $300 a week for auto expense plus $375 a week for medical insurance + $180 a week for workman's comp, payroll taxes and unemployment contribution. A total weekly outlay for your "sales department" of $2655, This is 12.6% of the gross sales. If you are working on 25% gross profit, 1/2 of the money available is going to pay salespeople-and nothing happens before a sale is made.
You say no problem! How are you going to process orders, pick cases, load the truck and make the deliveries? $21,000 a week in sales could be 2333 cases at an average selling price of $9.00. This is 466 cases a day to be delivered x 20 lbs = 9,300 lbs-almost 5 tons to be load on trucks, then unloaded off the truck an order at a time and dragged into the store on a hand truck and put down in the corner and handed off to someone sliding them down the cellar steps on a board. If the average order is $125, you have to make 33 deliveries x 5 days a week. This number of orders already requires you to break up the orders onto 2 delivery trucks. If the trucks get loaded early, and the trucks leave early, one driver should be able to make 15-20 deliveries if he is not required to do merchandising or these are drop, collect and go stops. If you want the drivers to restock shelves and coolers, or these are time consuming supermarket stops, or they can't make deliveries to deli's at lunch time, or the stops are very far apart (low account density forcing them to run all over the place), one driver without a helper could knock out 15 deliveries a day or they will be out very late or you will have a lot of undelivered orders that will have to go out the next day. This second deliver attempt will wipe out the profit for this order.
Two drivers, the related payroll expenses, two trucks, insurance, maintenance, fuel, tolls, parking tickets, etc will cost you $1600 a week. Add up the sales expense of $2655 plus the $1600 for the two trucks and drivers and you have a combines sales and delivery expense of $5040 which is 24% of the gross profit. So how can you work on 25% gross profit? If you work in 30%, you have 6% left to pay for the warehouse, utilities, phone, internet, computer hardware, software, forms, security alarms, office and warehouse personnel and YOUR PROFIT.
The shortfall needs to come from somewhere: you work for free, you do 3 jobs, your kids work for free or as you sell off inventory, you use the other 70-76% (cost of goods) to pay your expenses which exceed the 24% expenses. If you are working on 30% gross profit and figure 10% for sales, 10% for delivery expenses, 5% for warehouse and office expenses and save 5% for profit, adjust the numbers accordingly.
Compensation of Sales Managers
First, not everyone who doesn't quit or gets fired as a salesman should be promoted to sales manager. The best salesperson who can open accounts and is relentless in building your account base has a different skill set than a salesperson who is only capable of maintaining exisiting business. Too many times, companies promote a mediocre salesperson to a position of "sales supervisor" and compensates him on a salary with some type of arbitrary Christmas time "bonus" and gives him a company car. This sales manager either covers routes when people are on vacation, or is expected to come back to the office early and wait for the salespeople to come back from the street and he "checks them in" by asking questions that once the orders are downloaded and processed, can be answered by looking at a computer generated sales report. Debriefing the salesperson and asking them how many orders they got that day, and how many cases they sold and how many of product x was sold and how many customers bought product Y is a ludicrous waste of time because after all the orders are processed, this information can be printed out for each salesperson for that day, or for the week or for the month. With the reports in hand, both the salesperson and the manager can go over the reports to see what progress is being made. The number of cases sold is not a measure, if they are all cheap products with low margins. The gross dollars are only meaningful if the profit margin is maintained and the salesperson is not discounting products.
Sales managers should be compensated on a small base salary and a commission override on each and every salesperson they supervise. This motivates the sales manager to build a team of 5 or 6 people who are aggressively building the account base in each of their territories, selling existing customers new products by effectively using samples, sales materials, relationship selling, merchandising techniques. The sales manager is riding with each salesperson and can cover every customer by rotating the day he rides with each of his sales people. If you are servicing accounts every other week and each sales person has 200 accounts and there are 5 salespeople, the sales manager should have visited each of the 1000 accounts in these 5 territories in the course of 2 or 3 months. The sales manager should either be out on the street riding and coaching a salesperson or working in that salesperson's territory alone to gauge the effectiveness of the salesperson in developing the territory, building rapport with the buyers and showing another face from the company.
If you are a small operation and you yourself are successful at selling on the street, then this is your other job, especially for the first 2 or 3 salespeople. If you manage the first 3 salespeople in this manner, you will quickly identify the person who understands the process, is committed to the company's goals and is looking to leverage their knowledge and skills by working on an override, confident they can coach others to perform.
The brutal fact is that there are so many hours in a work day and there are so many places a driver can drive to, get out of the truck, pull out the merchandise, bring it into the store, wait to get paid, put the hand truck back in the truck and drive off to the next stop. If the route is in chaos with stops requiring the driver to double back, gets him there in the middle of lunch and the customer tells him to come back, you have COD accounts that have no money to pay the driver and you either leave it and someone has to collect the money-or try to collect the money later or else you have to bring it back when the customer "has money" or the "boss is back". Or the route is laid out so there is absolutely no efficiently because the stops run from one end of the county to the other, or delivery dates were promised so the same truck is passing the same accounts 3 times a week, or you accepted a 3 case order from a customer who calls at the end of the week and wants another 3 cases...it's endless. The bottom line is that you need to cover a fixed amount of dollars for a sales call and also a fixed amount to load the truck and delivery the goods.
It's a rare salesperson who can sell $2500 a day to small up and down the street accounts because these little stores buy small quantities because they just don't have the store traffic or they want to spread the money around" and buy something from each of their suppliers -you competitors, or they do most of their shopping at cash and carry wholesalers who can undersell you because they do not have any sales or delivery expenses to cover. When you are selling big end displays of product at the supermarket at a loss, it's easy to go out of business selling volume.
The profit in the beverage business is in the up and down the street trade. You actually need 2 salespeople each booking $1250 a day in orders to fill up one truck. If each salesperson make 25 calls on existing customers, maybe 1/2-2/3rd of them will buy so they should be getting 12-16 orders a day. 10 orders at $125 is $1250, 12-$100 orders is $1200 and 16-$75 orders is $1200
$2500 a day at 30% gross profit is $750 a day. $1200 at 30% is $360. 2/3rd of this is $237 The truck, insurance, maintenance, fuel, tolls and the driver costs $150 a day...more if you have to pay a helper, each salesperson and their car expenses are going to cost $125. Combined, that $275..more than the 2/3rd gross profit. You are short the $40 to cover other costs like the warehouse, any office help, any money you can take out of the business. You are losing money and will use cash to pay these other expenses and find out you are then short to pay for more merchandise.
A salesperson selling $6000 a week x 50 weeks (don't forget two weeks they take off that you have to pay as holidays or vacation)=$300,000/year @ 30% Gross profit=$90,000 total gross profit just to tread water. 1/3 of $90K is only $30K and this has to cover salary, commissions, payroll taxes, unemployment, workman's comp, auto expenses, Nobody is going to work for $20K..if they do they are unable to sell or are mentally defective. If you allocate 50% of the gross profit to cover sales expense, you have to squeeze all your other expenses including delivery, warehouse, office and profit and you still have a mediocre salesperson drawing $30K out of the profit structure. If you through in medical insurance to your employees, you might as well stay home and sell things on Ebay.
This is why there are so many brain dead order takers in this industry working for the big beer and soda distributors who are paid essentially to take orders in c-stores and supermarkets for items either a well heeled "parent company" paid to have placed or "someone who can sell went out and sold every account" and the order takers -devoid of higher sales skills or personality-collect orders like they collected dead bodies on carts during the Black Death. They chant "bring out your orders", do you need anything, we have a deal on this, "if it's not a drop, it's not a stop", "pile them high and watch them fly", "buy one get one free".
For a sales person to make $40,000 a year (gross) without any auto expenses, they would have to sell $600,000 worth of merchandise or somewhere close to $12,000 a week which is $2400 a day in sales which is 10 x $240 orders or 12 x $200 orders or 15 x $160 orders. It about as good as it gets. If you spend valuable sales time trying to sell people who buy $60 worth of stuff, you will have to work at the speed of light to see more customers a day which moves the call into sticking your head into the door and asking "You don't need anything today, do you?". You are now just taking orders and there is no account development. I heard the saying "if it's not a drop, it's not a stop!" many times meaning if your not going to get BIG orders from the customer, drop the account or give them very poor, infrequent service forcing them to just go pick up his merchandise from a cash and carry or order from a competitor who has the resources -trucks and manpower-to drop off an occasional small order and be happy about it. Consider the cost of delivering small orders everyday. The driver, the truck, insurance, gas, man power to process the orders, pick the order, load the truck are time and subsequently money driven. There is just so many stops a driver can drive to, unload the merchandise, put in on a hand truck, roll it into the store, stand and wait to be checked in and finally get paid, put the hand truck back on the truck and drive off the the next stop. Set a minimum order and stick to it.
Charges vs COD
You are a small undercapitalized company. You have to prepay for merchandise or have limited credit with your suppliers. How can you give customers credit when you have to pay all your expenses at the end of the week and accumulate cash to either pay the last bill or the next shipment of product? Too many companies have evaporated by extending credit to customers. Some of this money will never be collected and there is a credit risk, but the main problem is you are using your limited working capital to finance trade receivables (people who owe you money) and you don't have enough cash flow to cover the cost of goods (CoG) or your operating expenses. If your customers want credit and you give it to them and they even pay you in 15 days, you will have thousands of dollars on the street and not be in a position to pay for the merchandise and suppliers may not ship you another load and you will not be able to pay out the 25% of your selling price (based on 30% gross profit) for sales, delivery and warehouse costs. Selling customers who never have any money because they have no cash flow themselves, or are pulling cash out of their businesses themselves, or just want to take advantage of trade terms offered by larger, well capitalized competitors should not be your priority at the beginning. Aside from a cash flow squeeze, there is extra time and costs involved in tracking these accts receivable and the longer they are unpaid, the harder it will be to try to collect. If you have to give credit, I would only extend credit to companies that have been in business for at least 3 years and do their bookkeeping weekly and want to have their checks for purchases done weekly and mailed out to you.
Most reasonable customers-small businesses like yourself-understand cash flow and if you tell them that you have to pay for the good every time you order and can't afford to give them credit at this time, they generally are understanding. It's the bottom feeders who will blow you off and buy from a competitor who is offering "free financing".
The customer wants to pay you weekly for the goods AFTER he sells them. He does not want to "invest" his money to see if your products will sell. You drop off $100 worth of stuff and next week the customer decides to pay you $15 on account. At some point, nobody remembers what was sold or paid or the customer decides to "return" everything to you because "it's not moving fast enough". Or hopefully, they are satisfied the product sells through and will pay you for the first order. They may then want to shift the payment terms to "bill to bill".
Bill to Bill
The customer wants "limited credit" and wants to pay this first bill when you make the second delivery and charge the second delivery. This goes on forever, so they are always out there for one invoice which you have to track and collect. Then comes the time, you make the delivery and they don't have "the check" or "can you come back later" and you leave the order and voila!. They are into you for 2 invoices. If you have 100 customers wanting $100 worth of credit-You need $10,000 worth of working capital to handle this.
You need working capital for product purchases, trade receivables, equipment purchases, salaries and expenses paid to "trial salespeople" who you have to pay for a couple of weeks to see if they are effective, and you have to pay yourself. It's not going to happen if you start giving people credit you can not afford to give at this stage of the game.
You may find yourself needing and being able to qualify for a credit line at a bank. Do you need this available money to buy more inventory because you are selling more product to more customers, or are you running short of inventory because you are giving credit to people and have no cash flow to replenish your inventory? You may be borrowing money from the bank to "lend it" to customers who really can pay you, but are taking advantage of you. Remember, the bank will want YOU to personally sign for the "credit line" along with your spouse and may take a "security interest" in everything in the business that is not leased. If the business folds, you and your wife are on the hook, because the inventory is worth 10-20 cents on the dollar and the bank knows your receivables will be hard or impossible to collect.
DO NOT FACTOR YOUR RECEIVABLES!
More predatory than a bank and they may take a second mortgage on your house...just in case. Just tell the customers you just are not in position to offer credit. You have to get paid so you can replenish your inventory and you have to have cash to pay for "truck loads" of product in the thousands of dollars. This will make their request for $100 worth of credit seem petty and they will consent to pay you. Save your working capital to buy more inventory as you grow.
You walk into an account and you see one Pepsi cooler and one Coke cooler. Or you walk into an account and there are 3 coolers-the third being A Snapple Cooler or some other brand owned by a 2nd tier distributor. You have a problem. The buyer says we can't put anything in these coolers or they will take it out of my store. Some buyers are from foreign countries and they obey authority. They will not budge. You are not going to convince many of them it's OK to put your product in these other coolers. Some store owners hate authority and will put anything they wat it the cooler or Pepsi can shove it! But space is limited and how many products can you get into this account? A single door cooler has 5 shelves and most are 7 items wide. So if you have one two shelves for Pepsi and one shelf for water, that leave only 14 slots left and these are not empty slots.
You have to overcome this objection if this account will buy. Sitting warm bottles on the counter and keeping the cold bottles in the cheese refrigerator in the back of the store isn't going to work. Ice barrels, counter displays are limited.
Some stores own their own cooler and you only have to convince them to "make room" which means cutting two rows of one product down to one or eliminating a competitor with something that is 1)better 2)sells faster 3)more profitable or they like you personally and want to help you with your small business and will buy some stuff from you-the sympathetic sale.
If you walk in with 20 products and the buyer gets excited and wants to sell them, they may ask you if you have a cooler to give them. Coolers cost $600-1000 for a single door cooler. Little counter top coolers are useless and cost $500+. Even though you are "lending" the cooler to the account, if they sell the business or closed the store, you will not get a call to pick up your cooler. You can find it being sold on Craig's List. You can have al the decals stuck all over the cooler, record the serial numbers and have contracts, but expect to lose coolers. And expect that people to whom you gave a cooler, stop buying from you, or buy very little and then put everything from competitive products to pickles to bait in your cooler.
You can buy a trailer load of coolers and find a leasing company to finance them, but they will usually do this for 3 years and it will cost you at least $10 a week for a cooler or $40 a month. If the account is only buying $250 a month from you at 30% GP, you have $75 total gross profit and you need that to cover sales, delivery, warehousing and your profit. Impossible. $40 is half of your gross profit. You can not pay for the cooler and operate the business servicing this customer 2X a month with $250 worth of product
And it's always the little accounts that want the cooler and they can hardly buy $250 from you...that would be 25 cases @$10/cs or 20 cases @ $12.50 a case. The accounts that tell you on one of the trips they're "OK"-don't need anything or it will be the "can't pay this week" or the "bill to bill" account.
If you allocate all your 3.3% profit before taxes and depreciation (1/3rd of 1/3rd of the gross profit) that you are making after covering all the expenses to to cost of a cooler for one account, you would need to sell this account $1300 a month. You are not Pepsi or Coke, Jack!
Coolers require a capital investment in your distribution business and become part of the mix. Some distributor buy 50 coolers a year at $50,000 and figure out where they go eventually...often to the wrong accounts. And once you give an account a cooler, it's yours to maintain and repair. It costs $75 for a service call and about $400 to replace a compressor. You can look for defunct coolers in back alleys and on Craig's List but you have to pick them up and refurbish them and unless your brother-in law is a refrigeration mechanic. it will be a costly endeavor.
You need to hit up your suppliers to get a little support for coolers and might be in a better position to do so if you can document the placements, show growth in the sales of their brand and are current with your payments for merchandise. Maybe you can get $5 per cooler per month if you have 3 facing of their product in the cooler. If you can get 3-4 suppliers to subsidize the cost of the coolers at $5-10/month per cooler , you now have a cooler program!
The Independent Sub-Distributor Solution
You have 1500 accounts which you allocate 150 accounts to ten bi-weekly routes. You find individual with sales skills and personality that also understand the work involved in loading a truck, servicing and building a territory, shows up with their own truck with your decals and branding on it, wears your uniforms, uses your route management system top track customers and purchases and work for themselves as independent contractors. You have no payroll costs and at the end of the year you give them a 1099 showing the dollar amount of merchandise they purchased from you. They work on 60% of the gross profit and you work on 40% to cover sales management, office, warehouse expenses and profit.
150 accounts paying an average of $250/month x 12 months=$450,000 gross sales @ 60%= $81,000. The only expense is the truck, uniform service, rental on the account management software and hardware. They should be able to make $55-60K a year and more if they are coached and worked with to sell new accounts and new products to existing accounts. From your end you make $54,000 on the gross sales of EACH sub-distributor which is $540,000 a year from which you cover the warehousing, office, sales supervision, promotional, administrative expenses. How you control breakage, pilferage, theft, manpower will determine how much of this will be your net profit. Ten people showing up every morning trying to get loaded and paying for the previous day's load and people in the office and people in the warehouse picking and checking their order will be the expenses you'll incur in additional to the sales effort you will need to implement to train, supervisor and manage these independent distributors as well as work the entire territory for sales opportunities that extend beyond each sub-distributor's territory.