About the Author
The President of ChannelCorp, Bruce Stuart is a Certified Management Consultant with experience in the computer hardware, software and telecommunications markets of more than 40 countries. He has authored in excess of 300 articles and eight books on the subjects of building channel partner business value and improving vendor channel strategy. He is a world renowned executive educator and strategic management consultant.

ChannelCorp Workshops
ChannelCorp provides Executive Education to vendor and channel partner management. Public workshops take place in Asia, North America and Europe. In-house workshops take place throughout the world. For more information, go to the Workshops section of www.ChannelCorp.com.

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1.1 Cash Is King - target quality clients and get paid promptly

The businesses of solution providers live and die based on cash flow. Those businesses that will fail this year will not fail because they do not have great people with great skills. The failures will have run out of cash. With no equity from public markets or venture capital providers and no debt from anyone other than vendors, 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 (speed up the accounts receivable cycle)

Management 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 solution providers with a variety of business models has rendered a very simple 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 solution provider can create. When a solution provider generates Type A revenue, each revenue dollar costs less than fifteen cents to create. This source of revenue generally results in profitable business (Figure 1).

Figure 1 - New markets and new products require cash

Source: ChannelCorp

In an economic downturn, it is critical for solution provider management to segment their installed base using ability to pay as the segmentation basis. The long term client who is 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% of a solution provider’s client base that generates 70-80% of the revenue (Figure 2). This is where the solution provider is most vulnerable to the cash flow problems of its clients.

Figure 2 - Evaluate Installed Base using ability to pay as key criteria

Source: ChannelCorp

If a solution provider finds themselves in a cash flow jam in the latter part of 2001 or early 2002, then revenue sources should be rethought. Investments in new markets and new technology should be dramatically scaled back, and efforts should be focused on quality clients in the installed base. (Figure 3)

Figure 3 - Refocus sales/marketing in a slow economy

Target for Growth	Mature Profitable Reseller % Revenue	Financially Troubled Reseller % Revenue
A - Existing products/services with existing accounts	60-70	90-100
B - Existing products/services with new accounts	5-10	0-5
C - New products/services with existing accounts	5-10	0-5
D - New products/services with new accounts	5-10	0

Source: ChannelCorp

If action is not taken quickly, bad results will follow (Figure 4).

Figure 4 - Cash flow jam - take action quickly

Source: ChannelCorp

Getting paid
On average, eighty percent of solution provider expenses need to be paid within thirty days. The average time to collect on an invoice in the business is sixty to seventy days. In a solution provider with revenues of ten million dollars and a breakeven profit position, the gap amounts to a working capital gap of slightly over one million dollars (Figure 5).

Figure 5 - Revenue/payable gap

Source: ChannelCorp

The same ten million dollar solution provider, with seventy days of accounts receivable has almost two million dollars outstanding on any given day (Figure 6).

Figure 6 - Accounts receivable . . . working capital black hole

Days Outstanding	A/R Investment	Annual Cost (10%)*
70	$ 1,917,808	$ 191,780
60	$ 1,643,835	$ 164,383
50	$ 1,369,863	$ 136,986
40	$ 1,095,890	$ 109,589
30	$ 821,918	$ 82,191

* Cost equals interest plus loss due to bad debt

Source: ChannelCorp

No wonder over 50% of solution providers are technically insolvent. Analysis of solution provider failure usually reveals that the cash that was required to survive was poorly invested in accounts receivable. Getting paid is obviously a critical focus in today’s economy.

The Accounts Receivable Project
Best practices in solution provider operations extend to accounts receivable. The following is a list of policies and practices that will be found in those solution providers that survive.

1 Avoid problem customers. Generate a list of danger signals that will help you sell to clients who will pay their bills. Do not sell to organizations that can’t pay their bills.

2 No shipments without Purchase Orders. Do not ship products or deliver services until you are sure that the client has the budget in place for the purchase before you ship, or deliver services.

3 No shipment without an invoice. Make sure invoices accompany all shipments and deliveries. Bill services weekly.

4 Make sure that all invoices are perfect. What can be wrong, will be wrong.

5 Cross-reference everything. Make sure that the Purchase Order Number is on everything.

6 Specify a payment date. Do not specify 30 days, specify a real date.

7 Add an incentive, or a penalty. Make sure that your invoice gets attention.

8 Add a call-back message. Make the call-backs to make sure payments happen.

9 Understand your client’s accounts payable systems. Give them what their system needs.

10 Troubled projects often have sloppy beginnings. Do not proceed with service provision without a contract document that specifies fees, milestones, deliverables, payment schedules and ownership of work. Do not assume anything.

11 Do not proceed with service provision without written acceptance of contract by a client representative. If the individual leaves the client, get another set of contract acceptance signatures before you continue.

12 Reserve the right to stop service provision for non-payment. Communicate this to the client. Warn once, then show willingness to stop work.

13 Create separate service invoices and product invoices. Do not make payment for product contingent on satisfaction with service.

14 Pay your salesforce when the cash is received. Focus your salesforce on getting paid when you get paid. Do not allow sloppy collectors to create receivables problems.

15 Pay a bonus for salespeople who bring in prepayments or deposits. Turn your salesforce into partners in your cash generation strategy.

16 Teach your salespeople how to sell the lease option. They will get paid earlier, and so will you.

The next eighteen months are going to be tough going. Focus on the right clients. Watch your cash flow carefully.

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The foregoing document has been excerpted from the 6th Edition of the Reseller Management Handbook, available for $100.00 U.S. from ChannelCorp Management Consultants Inc.

ChannelCorp Consulting services
ChannelCorp provides strategic consulting in the areas of channel economics, channel strategy, channel marketing, channel development and channel management to hardware, software and peripherals vendors around the world. ChannelCorp is also widely recognized as one of the industry’s leading authorities in the areas of reseller and solution provider profitability improvement.

ChannelCorps’s management consulting expertise is built on a solid foundation of fifteen years of researching and analyzing the evolving business models and marketing strategies of the vendor and solution providers worldwide.

Suggested Reading
For more information on the topics covered in this article, you should consider purchasing The Channels Handbook and/or The Reseller Management Handbook. For more information, go to the Products section of www.ChannelCorp.com.

Availability
ChannelCorp can make our copyrighted materials available to your organization for inclusion in your corporate newsletters and websites.

For information on republication, contact Bruce Stuart - channelcorp@telus.net

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