Insights
A former CRA auditor on the numbers that decide a distributor's survival: inventory turns, GMROII, fill rate, and the cash conversion cycle that quietly ties up your money.
Here is how I explain a distribution business to an owner who has run one for twenty years and never heard it put this way. You are not really a store, and you are not a factory. You are a working-capital machine. You borrow money, turn it into inventory and receivables, and earn a thin spread for closing the gap between when your supplier wants to be paid and when your customer actually pays. Everything good and everything painful in your business lives in that gap.
I spent years as an auditor at the Canada Revenue Agency, reading how businesses actually work versus how their owners describe them. I now run an operations firm and hold a Lean Six Sigma Black Belt, and I spend a lot of time in warehouses across Manitoba and the Prairies. The pattern is almost always the same. The owner is chasing revenue and worrying about margin, while the real money is trapped in plain sight, on the shelf as slow inventory and in the drawer as invoices nobody has chased. This is a look at the numbers that show you where it is.
Most distributors are managed on one number: gross margin. It is the wrong one to lead with, because in this business margin is usually thin and mostly set by the market. The distributors who make real money are the ones who watch three numbers instead.
Here is why turns matter more than owners think. A distributor running a 25 percent margin and turning inventory six times a year earns far more on the same capital than one running a 32 percent margin and turning twice. The second owner has the better-looking margin and the worse business. If nobody has ever shown you your return on the money tied up in stock, that gap is usually the single biggest opportunity in the building.
The cash conversion cycle is three numbers stitched together, and once you see it you cannot unsee it. It is your inventory days, plus your collection days, minus the days you take to pay your suppliers. In plain terms: how long your cash sits as stock, plus how long it sits as an unpaid invoice, minus the free financing your suppliers give you while you hold their goods.
Put in the standard letters, cash conversion cycle equals DIO plus DSO minus DPO. DIO is days inventory outstanding, how long product sits before it sells. DSO is days sales outstanding, how long a customer takes to pay you. DPO is days payable outstanding, how long you take to pay your vendors. The lower the whole number, the less of your own cash is trapped in the machine at any moment.
This is where owners quietly bleed. A distributor sitting at 75 days of inventory when 45 would be normal for the category has weeks of cash sitting on the shelves for no reason. A collection cycle that has drifted from 60 to 75 days over three quarters is a collections problem, not a sales problem, and it is worth catching before your bank notices it in your borrowing base. When money was nearly free, a stretched cycle was annoying. With today's rates on your operating line, it is a real and recurring cost you can measure.
Turns tell you speed, but speed alone can fool you. A slow-moving item at a fat margin can be a better use of shelf space than a fast one at a razor-thin margin. The metric that settles the argument is GMROII, gross margin return on inventory investment. It is simply the gross-margin dollars an item earns divided by the average dollars you have tied up in it. It answers the only question that matters on the shelf: for every dollar I have invested in this stock, how many dollars of margin does it hand back?
A common directional floor is around a dollar and thirty cents of gross margin for every inventory dollar. Below roughly a dollar, an item is arguably destroying value once you count the cost of carrying it. GMROII has become the most-watched number among serious wholesalers for a good reason: it stops you from celebrating a fast seller that earns nothing and from dumping a slow one that quietly pays the rent. If you run it by product class rather than blended across everything, you will usually find a small group of items funding the whole operation and a long tail dragging it down.
The signature disease of this industry is dead stock and stockouts in the same building at the same time. The warehouse is overstocked on slow items nobody is asking for and out of stock on the fast movers customers actually want, because reorder points were set by feel and never revisited. The tell is a growing line of inventory that has not moved in twelve months, right alongside a slipping fill rate on your top SKUs.
Both halves cost you. The dead stock is cash you already spent, now financed on your operating line and aging toward a write-down. The stockouts are margin walking out the door to a competitor who had the item. The fix is where a Lean approach earns its keep. Segment the inventory by how much it earns and how predictably it moves, set reorder points and safety stock from the data rather than memory, and build a plain plan to liquidate what is truly dead. Done properly, this usually frees cash within a single quarter, and it is often the highest-return project in the whole business.
Fill rate is how much of what a customer ordered you actually delivered, complete and on time. In food and foodservice it is close to sacred: drop below the mid-90s on a restaurant or chain and they will quietly trial a competitor before anyone picks up the phone to complain. So fill rate matters. But there is a trap on the other side.
Chasing a perfect fill rate on everything destroys your turns and buries cash in safety stock you do not need. The discipline is to protect a very high fill rate on your A items, the fast movers and the SKUs your best customers cannot do without, and to deliberately accept a lower service level on the long tail of slow B and C items. Not every part deserves to be in stock at all times. Deciding which ones do, on purpose and from the numbers, is exactly the judgment that separates a distributor who manages inventory from one who merely owns a lot of it.
When I walk a distributor through this, the sequence matters as much as the ideas. You want the fastest cash back first, so the work funds itself and the team sees it working.
None of this requires a new ERP or a consultant living in your building for a year. It requires seeing the numbers clearly and acting on them in the right order.
There is a second payoff that owners in Manitoba and across Canada feel quickly. Your operating line is advanced against your receivables and your inventory, and the bank's margining formula is effectively a second operating system running your business. Aged receivables and slow-moving inventory get excluded from your borrowing base, so the cleaner your collections and the faster your turns, the more the same assets are allowed to fund. Freeing trapped cash does more than put money in your account today. It quietly raises the ceiling on what you can borrow to grow, and lowers the risk of a covenant surprise when rates or the cycle turn against you. If you want a straight read on where your cash is trapped and what to free first, our operations health check maps it against your own numbers. You are always welcome to reach out and talk it through.
What is a good inventory turn number for a distributor? It depends heavily on your category, so treat any single figure as directional. Fresh food turns very fast, often well into double digits; building materials and industrial supply turn far slower, in the low single digits. The useful comparison is not against another industry but against your own history and your own product classes, watching whether a healthy fast mover is hiding a pile of slow stock.
What is the difference between inventory turns and GMROII? Turns measure speed, how many times a year you sell through your stock. GMROII measures earnings, how many dollars of gross margin each dollar of inventory hands back. A fast turn at a thin margin can earn less than a slow turn at a fat one, which is why GMROII is the better decision number when you are choosing what to stock and what to drop.
How do I lower my cash conversion cycle? Work all three levers. Reduce inventory days by carrying less slow stock and setting reorder points from data. Reduce your collection days with a steady, unapologetic collections cadence and a clear credit policy. And use your supplier payment terms fully rather than paying early out of habit. Even a handful of days off each lever adds up to real cash back in the business.
How fast can a distributor free up trapped cash? Faster than most owners expect. Inventory segmentation and a liquidation plan on dead stock often return cash within a single quarter, because you stop reordering slow items and turn aged stock back into money. Collections discipline shows up in weeks. The barrier is almost never the difficulty of the work; it is having someone look at the numbers straight and act on them.
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