Control Your Cash Flow
Business Solutions focuses a lot of attention on successful VARs. Sometimes, however, it's equally helpful to know what causes businesses to fail. As I was thinking about several reseller businesses that have failed over the years, it struck me that cash flow problems (aka uncollected payments) were a common theme. Consider this scenario. A startup VAR is awarded a $250,000-plus contract with a large customer. The VAR is so excited about the deal that it caters to everything the customer wants — including 90-day payment terms. Because of the size of the project, the VAR opens a line of credit with a bank, vendor, or value-added distributor (VAD). Day 90 comes and goes, and the customer still hasn't paid. The VAR's credit line is maxed out, interest is accruing, and the customer has no intention of paying these extra expenses. This scenario can be disastrous for many VARs.
Even if cash flow problems aren't threatening to close your business, they can prevent you from reaping the best profit margins from your distributor partner. At a recent distributor conference I attended, a VAR revealed to me that because of difficulties collecting customer payments, he had to open credit lines with multiple distributors. Even though he knew he could earn deeper discounts buying from only one distributor, he often maxed out his credit limit with the primary VAD because of uncollected customer payments and was forced to open additional lines of credit with other distributors.
If a VAR can establish a history of paying its credit debt on time, a VAD is often more flexible when the VAR needs to request a payment extension and/or higher credit limit. But, if a VAR is unable to collect payments from its customers in a timely fashion, it will never earn this level of trust from a VAD. Geoffrey Phillips (www.geoffreyphillips.com), a business consultant with more than 30 years of experience, knows what a problem cash flow can be for VARs, and he shared with me some revealing info. "A typical $12 million reseller has more than $1 million in uncollected payments," he says. "The best way to control this problem is to set specific payment requirements with your customers and require payment after key milestones are met." For example, a VAR could collect 50% of the total project cost up front, an additional 25% upon equipment delivery, and the final 25% following the completion of the implementation.
Phillips' payment collection plan makes a lot of sense, but what if a large customer won't agree to those terms? At the very least, you need to understand how many extra fees you're going to incur from your lender by borrowing money for extended periods. You should also check a few customer references to know whether your customer has a history of paying late. Perhaps the best thing to do will be to walk away from the deal. If not, you'll at least need to build in specific consequences if payment milestones aren't met. Let them know that payment delays will result in implementation delays. Also, the buying decision maker and the accounts payable clerk will be contacted regularly (known by some accounting departments and war strategists as a pincer movement) until payment is received. Keep in mind, also, that it's always much easier to enforce consequences prior to completing an installation.
Every VAR wants to earn large sales contracts, but they don't have to come at the expense of your credit line. By developing a plan to collect payment in a timely manner and being willing to enforce consequences if customers miss payment deadlines, you will reduce your cash flow crunch.