What we know is that it is crucial to the financial success of the information technology (IT) industry for all players in the ecosystem to make money and generate cash to sustain and grow their businesses. That is what ChannelCorp is about . . . that is what ChannelCorp business acumen is all about.
It doesn’t matter whether you are a business partner or a vendor, you need to understand cash flow and the impact that vendor programs have on partner cash flow.
ChannelCorp business acumen is a monthly column that focuses on what all players in the information technology ecosystem need to be cognizant of in order to stay financially strong. In view of the current economies in a number of markets, the next few issues of ChannelCorp intelligence will focus on the “last mile” in the information technology industry . . . the thousands of solution-providing VARs, dealers and retailers that put their own capital at risk to sell technology solutions to residential, commercial, industrial and institutional clients around the world. Over the last twenty years, ChannelCorp has learned critical lessons providing channel financ and business partner growth consulting to information technology vendors, distributors and business partners around the world.
We know that we can be a source of competitive advantage to various players in the information technology industry. Let us introduce you to the way we think about your business.
Cash flow
The businesses of information technology system integrators, dealers and retailers (business partners) live and die based on cash flow. Those businesses that will fail in the next year or so will not fail because they do not have great technology or great people with great skills. The businesses that fail will have run out of cash. With no equity from public markets or venture capital providers and no debt from anyone other than family or distributors or manufacturers, cash will need to come from internally generated sources.
Increases in internally-generated cash comes from three sources:reductions in the amount of cash used (retrenchment/layoffs)generation of more cash (boost sales)increases in the velocity of cash through the business by speeding up the accounts receivable cycle or slowing the accounts payable cycle.
Management of information technology business partners must focus on where to target sales and marketing activities. Management must also focus on how to get paid.
Where to target
Detailed analysis of a variety of information technology business partners with a variety of business models has rendered a very clear method to understand the cost dynamics of markets and technologies.
Selling existing products/services into existing accounts is the cheapest, most profitable revenue that a business partner can create. When a business partner generates Type A revenue, each revenue dollar costs less than fifteen cents to create. This source of revenue generally results in profitable business that generates positive cash flow.
Type B and C revenue, for the first year or so of the acquisition of the new account or product line, is marginally profitable from an accounting perspective and neutral from a cash flow perspective. Type D revenue is often called “net new” revenue. Type D revenue is the revenue that potentially gets business partners into financial trouble. Due to the high costs of client or account acquisition and the required investment in mastering a product line, Type D revenue often results in first year accounting losses and negative cash flow. Too much Type D revenue without enough cash coming in from outside (debt or equity) or without cash being generated by Type A revenue and the business partner goes out of business.
In an economic slow down, it is critical for business partner management to segment their installed base using ability to pay as a segmentation basis. The long-term client who purchases a large amount of product and service but is eventually unable to pay their bills may become a liability in a downturn. Quality customers are those who are able to pay for products and services that they contract for in less than sixty days. Marginal customers can take up to twice as long to pay (61–120 days) while troubled customers can take more than six months to pay. It is critical to focus on the ability to pay of the 20-30 per cent of a business partner’s client base that generates 70–80 per cent of the revenue. This is where the business partner is most vulnerable to the cash flow problems of its clients.
If a business partner finds themselves in a cash flow jam in 2009, then revenue sources must be rethought. Investments in new markets and new technology should be evaluated to increase the organization’s return on invested capital and shorten any investment payback periods. Efforts should be focused on finding quality clients in the existing accounts of the installed base.
You need to refocus sales/marketing in an economic slowdown.
Here are your target for growth for both a mature profitable reseller and a financially troubled reseller.
For a mature profitable reseller in Type A should aim for 60 to 70 per cent growth in existing products/services with existing accounts.
Type B should try for five to 10 per cent growth in existing products/services with new accounts.
The same goes for Type C and D businesses in the mature profitable resellers category with new or existing accounts.
For financially troubled resellers in Type A they should aim for 90 to 100 per cent growth in existing products/services with existing accounts.
Type B should try for zero to five per cent growth in existing products/services with new accounts.
And, again the same goes for Type C and D in the financially trouble reseller category for new and existing accounts.
If action is not taken quickly, bad results will follow.
Take action quickly if:
Revenue
Product revenue levels decrease
Unit volumes decrease
Service, support, training and consulting (SSTC) volumes decrease
Expenses
COGS increase
Interest expenses increase
Bad debt expenses increase
cash flow
Internally generated cash decrease
Speed of A/R collection decrease
A/R write-offs increase
Speed of payment of A/P decrease
Asset levels
Cash balances decrease
A/R period increase
inventory investment/value decrease
Questions for contemplation
1 Which markets, solutions and clients will generate the most cash flow in 2009?
2 Are our best clients still your best clients?
ChannelCorp (www.channelcorp.com) is theIT world’s leading channel economics, partner finance and channel growth consulting and executive education firm. Founded in 1989 by financial people, ChannelCorp is trusted the world over by vendor, distributor and partner management. Material from this article has been extracted from the ChannelCorp Reseller Management Handbook available at www.channelcorp.com. Bruce R. Stuart, CMC, President of channelCorp can be reched at 604 263 6811 or [email protected].
