Distribution financial analysis by branch and product

Distribution financial analysis connects branch and product margins with inventory, receivables and payables to explain both earnings and cash needs. Begin with net sales and matched cost of goods sold, then reconcile the working-capital movement. A profitable branch may still require cash when stock and customer balances grow faster than supplier credit.

Prepare the branch and product views

Use the sales and credit-memo export, cost-of-sales ledger, branch expense report, inventory valuation, trade receivables and supplier-payables balances. Keep one accounting period, one currency and one branch mapping. Preserve product codes so the same sales can also be reviewed by product family.

Use net sales after returns, rebates and discounts. Keep inventory purchases separate from cost of goods sold: goods received this month may remain on the shelf at month-end. The IRS explanation of purchased merchandise cost includes invoice price less appropriate discounts plus transportation or other acquisition charges. Follow your ledger's inventory policy consistently rather than changing freight treatment between branches.

Run the branch and product summaries separately, then tie both to company sales and cost of goods sold. They describe the same transactions from different angles. Adding the two summaries would duplicate the business.

The general financial analysis guide covers the overall review. For specialized operating issues, use foodservice distribution financial analysis or industrial distribution financial analysis, which add their own stock and service questions.

Calculate margin and branch contribution

This illustrative US distributor reports a 30-day month. Branch operating expense includes assigned warehouse, selling and outbound-delivery expense; those costs are not also in cost of goods sold. Contribution is before depreciation, interest and income tax.

Create a Margin sheet with headers in row 1. Columns A through G follow the table, with branches in rows 2 and 3 and totals in row 4. Amounts are USD. Percentages and days are displayed to one decimal, using unrounded calculations underneath.

Gross profit = Net sales - Cost of goods sold

Branch contribution = Gross profit - Branch operating expense

Enter E2, F2 and G2 as follows, then fill through row 3:

=B2-C2
=E2-D2
=IF(B2=0,NA(),E2/B2)

Sum amount columns for row 4. Calculate total margin with =SUM(E2:E3)/SUM(B2:B3). Microsoft documents SUM as adding values, references or ranges; check imported amount columns for numbers stored as text before relying on range totals. Covirage is not affiliated with Microsoft.

The income check is 1,460,000 + 340,000 + 200,000 = 2,000,000. West earns the higher gross margin, but East generates more contribution dollars. Neither fact says which branch uses less cash.

Add inventory, receivables and supplier credit

Put the following balances on a Balances sheet, with headers in row 1 and branches in rows 2 and 3. Column order is A through G. Receivables and payables are trade balances; all sales in the example are credit sales.

Sum columns B through G in row 4. For a period-end snapshot, closing inventory days equal closing inventory divided by monthly COGS times 30. Closing receivables days use credit sales instead. These are closing-balance measures, not averages over the month.

On a separate Review sheet, enter inventory days in B2, receivables days in C2 and closing operating working capital in D2:

=Balances!C2/Margin!C2*30
=Balances!E2/Margin!B2*30
=Balances!C2+Balances!E2-Balances!G2

Fill through row 3 for West. East holds 11.7 days of inventory and 10.0 days of receivables, with $500,000 of operating working capital. West holds 16.1 inventory days and 12.0 receivables days, with $440,000 of operating working capital.

For the company, closing inventory days are 650,000 / 1,460,000 × 30 = 13.4, and receivables days are 720,000 / 2,000,000 × 30 = 10.8. The balance definition here is narrower than total working capital: inventory plus trade receivables less trade payables.

Reconcile the cash movement

Opening operating working capital is 600,000 + 650,000 - 400,000 = $850,000. Closing is 650,000 + 720,000 - 430,000 = $940,000. The $90,000 increase absorbs cash.

The SEC's financial-statement guide distinguishes income from cash movements. In this simplified month there are no depreciation adjustments, interest or income-tax payments, or other operating-balance changes.

The proof is 200,000 - 90,000 = 110,000 of operating cash, then 150,000 + 110,000 - 50,000 - 20,000 = 190,000 of closing cash. Tie that balance to the reconciled bank and ledger. Add every omitted adjustment when using the method on an actual business.

Where it goes wrong

• Purchases treated as expense. Purchases affect inventory and payables before the goods necessarily become cost of sales.
• Branch transfers counted as sales. Eliminate internal transfers from the company total and carry the associated inventory consistently.
• Stock measured at selling price. Use the inventory carrying value that reconciles to the ledger, not potential revenue.
• Late credits omitted. Returns and rebates can overstate revenue and leave receivables that will never be collected in cash.

Review your distribution workbook in Covirage

Upload your branch sales, cost and balance workbook: Covirage maps the columns, its tools compute and check margins and working-capital movements, and the external AI model explains the results with every figure traced to its rows. Create a free Covirage account, which takes about a minute, then set up your business and bring a sample of your own data.

See Covirage for distributors for the industry context.