Fuel wholesale businesses often report impressive projected turnover. Turnover, however, does not show how much cash the business needs to complete each transaction or how long that cash remains tied up.
A wholesaler may earn a modest margin per litre while paying the supplier before loading, paying the transporter shortly after delivery and waiting 30 days or longer for the customer. The business can appear profitable on paper and still run out of cash.
Working capital is the cash required to complete the trading cycle
In a simplified transaction, the wholesaler:
- Receives a customer order
- Obtains a supplier price
- Pays or secures the product
- Arranges transport
- Delivers the fuel
- Issues an invoice
- Waits for customer payment
The business must fund the costs that arise before the customer settles.
Why the litre margin can be misleading
Assume a wholesaler expects to earn a gross spread on a large delivery. The spread is not the final profit and does not represent the cash required to trade.
The calculation must account for:
- Product purchase price
- Transport and delivery cost
- Depot, throughput or handling charges
- Insurance
- Finance costs
- Sales commissions
- Administrative overhead
- Quantity losses or claims
- Credit losses
- Price changes before loading
The business should calculate contribution per litre after variable costs and then test whether the remaining contribution covers overhead and risk.
Supplier terms drive the initial cash requirement
New wholesalers may be required to prepay for product. Others may need a deposit, guarantee or approved credit facility.
Understand:
- When the supplier price becomes binding
- When payment is due
- Whether the price changes before loading
- Minimum order quantities
- Credit limit and security requirements
- Refund or cancellation terms
- How product shortages are handled
A supplier account is not commercially useful if the business cannot fund the required purchase.
Customer credit can consume growth capital
Offering customer credit can increase sales, but every unpaid invoice uses capital that could have funded another load.
Before approving terms, assess:
- Customer creditworthiness
- Expected monthly volume
- Maximum exposure
- Payment history
- Security or guarantees
- Dispute and set-off risk
- Concentration risk
A single large customer can create dependency and a major cash-flow gap.
VAT timing must be modelled
VAT can create a timing difference between invoice values, supplier payments and statutory obligations. The exact tax treatment should be confirmed with a qualified tax practitioner, but the financial model must not treat VAT as free operating cash.
Maintain separate records and plan for the timing of output tax, input tax and payment obligations.
Transport terms matter
Transporters may require payment immediately, weekly or within a shorter period than the customer. Additional charges can arise from waiting time, route changes, failed deliveries or after-hours loading.
The transaction model should show:
- Quoted transport rate
- Distance and zone assumptions
- Minimum charge
- Waiting-time rules
- Toll and access costs
- Payment date
- Claim and incident procedures
Price volatility creates quotation risk
South African fuel prices are adjusted periodically, and product quotations may have short validity periods. The DMPR explains that petrol prices are regulated and adjusted monthly, while diesel retail prices are not regulated even though a wholesale list price is published.
A wholesaler should define:
- How long a customer quotation remains valid
- Which price date applies
- Whether the order is subject to supplier confirmation
- How statutory price changes are treated
- What happens if loading is delayed
Calculate the cash gap, not only the profit
For each transaction, identify:
- Total cash paid before delivery
- Total cash paid before customer settlement
- Expected customer payment date
- Maximum days cash is outstanding
- Contingency for delays or disputes
- Cash available for the next order
Then model several transactions occurring at the same time. A business may be able to fund one load but not three concurrent customer orders.
Use sensitivity analysis
Test the effect of:
- Lower margin
- Longer customer payment terms
- Higher transport cost
- Delayed delivery
- Customer default
- Reduced supplier credit
- Price movement
- Lower sales volume
A model that only works under perfect assumptions is not ready for implementation.
Build financial discipline into operations
UFuel’s petroleum business-plan and financial-modelling service connects volumes, margins, working capital and operating assumptions. The Petroleum Wholesale Readiness Programme also explains the commercial cycle behind a wholesale transaction.