Keep the cash flowing in

It's profit and margin, not turnover, that will help you stay afloat in the choppy waters of recession. Paul Bray reports on what could save you.

In the depths of the current recession, Mark O'Hara, managing director of systems integrator Hydra Solutions, was interviewing a salesman who worked for a reseller. "He told me proudly that he'd earned £120,000 for achieving £1.5m revenue," says O'Hara.

"The only problem was that he had only achieved six per cent gross margin selling commodity products."

Perhaps not surprisingly the salesman's employer soon went bust, joining a legion of other resellers in the insolvency courts.

Most of these firms go belly-up not because the gods have got it in for them, but through particular failings which many could have remedied: poor financial planning, failure to give good service, over-exposure of products to too few customers, injudicious changes of focus and failure to keep key staff.

Unfortunately, when they hit the quicksand many resellers panic and carry on running, instead of keeping their heads and looking for an escape route. O'Hara's interviewee, blindly chasing sales that were doing his firm no good, is a classic example.

Ian Kilpatrick, chairman of distributor Wick Hill, quotes an old maxim: "Turnover is vanity, profit is sanity, cash is reality."

Incentivise your salesforce with profit
Wiser resellers incentivise their salespeople with profit, not revenue, and examine the profitability of each potential contract.

"There's business we could have picked up but didn't want to because the true cost and low margin means we're not interested," says Simon Sjenitzer, sales director at Fujitsu Siemens reseller XMA.

"I want to grow the business on something more sustainable that provides more value."

This approach may require detailed analysis. Alistair Brett, sales director at distributor Computer 2000, says: "We use activity-based costing to identify how much it's costing us to do business in specific areas.

"This enables us to deploy the right level of resources in each area. It's a good way to identify where the business is really making money and keep a close eye on margins."

Discounting is a mug's game, warns Mukesh Gupta, managing director of security distributor e92plus. "Resellers who look to increase business by simply cutting prices will develop a customer base that's totally disloyal," he cautions.

"If they buy the cheapest today they'll buy the cheapest tomorrow, and you can't keep playing that game. It's the added value that keeps customers."

If you have to discount, get a quid pro quo, advises David Freedman, head of IT at sales and management training specialist Huthwaite International.

"When you negotiate, make sure that if you have to yield anything on margin, you use things like shortening payment terms as a trade-off," Freedman says.

He adds that most resellers have high-margin and low-margin solutions, and that higher-margin solutions may not always be most expensive for the buyer.

"You may need to identify which solutions are affordable to customers and have the highest margins for you, then train and prepare staff specifically to sell those," he says.

Resellers should also look at the differing margins they are getting from vendors, says Ben Cooper, reseller account manager at software vendor Albany. "Resellers shouldn't be afraid to look for higher margins," he says.

"If times are tough for the dealer, then the vendor is probably feeling the pinch as well. Expect a target review and bear in mind that vendors will usually negotiate with their big hitters first to protect their key revenue streams."

One of the most common causes of business failure is lack of short-term cashflow, even though there is plenty of revenue in the pipeline; so efficient and proactive cashflow control is essential.

It is easy to make credit checks on customers, and resellers should be particularly vigilant against fraud.

Any decent accounting software, or even a well-written spreadsheet, should allow you to check your credit balance and your liquidity ratio, forecast your cashflow and warn of impending problems such as a build-up of overdue bills.

Specialist credit control packages can warn credit controllers when credit terms or payment promises have been or are about to be broken. Many can automatically distribute statements, copies of invoices, reminder letters and so on.

Maximise your cashflow
Gary Waylett, managing director of financial systems reseller Eclipse, recommends several procedures for maximising cashflow.

These include signed terms and conditions with all customers that clearly detail billing and credit terms; formalised sales invoicing and credit control procedures that reflect these terms, which must be followed every day; automated production of statements and reminder letters for all customers; offsetting discounts against strictly adhered-to payment terms; and ensuring invoices are included when goods are shipped, and changing billing cycles from monthly to weekly.

"By introducing some or all of these measures, cash collection could be improved by five to 20 days," says Waylett.

He also lists some telltale signs that a customer is in trouble: payment promises are consistently broken; you are unable to contact the person responsible for payments; queries are raised on invoices and after seven-day legal letters are sent.

"It's essential that face-to-face meetings are arranged between senior representatives of the customer and reseller at the very earliest signs of any of the above," says Waylett. "We've found the best thing is to allow the customer to spread payments over an extended period.

"But if they won't meet you, it's a sure sign they're about to default, and I'd suggest legal proceedings are initiated ASAP."

Trevor Evans, marketing manager at telecoms vendor Alcatel, outlines a more drastic solution. "Resellers should make sure the systems they implement have remote access; then they can switch off kit if the customer doesn't pay!" he says.

The one thing resellers should not do is pass on cashflow problems to their own suppliers, O'Hara warns.

"Delaying payments to suppliers is very short-sighted, because they will either refuse to deal with you again or impose strict conditions, such as payment in advance, which has exactly the opposite effect to what you wanted," he says.

Bank managers recommend all firms should make a business plan once a year and update it every quarter, but many resellers do not. One sheet of paper is enough, as long as it is well thought through and shows the key facts, such as what you want to achieve, the opportunities to do this and the issues that may hinder you.

Budgeting is also essential, and should remain realistic, especially in a recession. "Budget carefully and ensure that those responsible for delivery live within those budgets," says O'Hara.

"If the sales or gross-profit figures don't measure up to expectations, recast the budgets. The key is to be able to respond quickly to changing conditions."

A classic mistake is failing to reduce costs as sales or profits fall. "If sales drop and expense levels are not managed closely, a business can quickly become unstable," warns Nigel Rix, regional director at security vendor Stonesoft.

David Round, managing director of BMC reseller KTSL, has two tips: know how much time you are spending on each activity and don't waste time on the wrong customers.

"The main costs for resellers are administration and sales overheads," he explains.

"Resellers should continually review the level of support and attention they give, and spend time with customers who show a commitment to spending constructive time with them."

Look for efficiency savings
Canny resellers should always be looking for efficiency savings. "Before considering recruiting extra staff, review how the company operates and how it's organised, identify time-consuming manual tasks and look to automate as much as possible," says Waylett.

"Ask yourself whether, by automating a process, you'll maintain or improve the level of service you're giving your customers and reduce the time existing staff spend on manual or repetitive tasks."

Excessive stock can be a nightmare, especially on low-margin, short-shelf-life items, so use just-in-time ordering to make your distributor or vendor take the risk instead of you.

Brett says: "Online ordering and services such as drop-shipment and private label can help cut operational costs by reducing the potential for errors and reducing the number of contacts you need to make.

"This applies especially to low-value or low-margin transactions and leaves the reseller time for more personal or technical enquiries."

The great temptation when orders slacken is to look for greener grass in another field, but most observers believe it is better to stick to what you know.

"It's tempting to take on more product to increase opportunities to sell, but this comes at a price in terms of support and sales education," says Round. "Instead, focus on your core competencies and identify and build on those that are differentiating or unique.

"After all, it's often why businesses have grown and succeeded. Understanding those competencies needs research, with customers, suppliers, partners and, very importantly, your own staff."

The two riders to this argument are: don't stay in a market that's obviously dying and don't rely solely on product sales with wafer-thin margins.

The smart money is in providing services. XMA, formerly largely a telesales operation, has created a services and solutions business almost from scratch in two years. This now accounts for 20 per cent of its sustainable business, and Sjenitzer aims to grow it by 30 per cent next year.

"We've tripled the number of solutions we've sold to SMEs, which more than makes up for loss of product revenue," he says.

If you don't want to stick solely to your knitting, branch out into crochet rather than market gardening - in other words, something related to what you know. "To maximise existing business, resellers can cross-sell," says Sarah Millington, business partner account manager at software vendor Accpac.

"It's important to protect the areas you have good knowledge in but also to have a portfolio that stops your customers contacting anyone else."

It's always more efficient to do more business with existing customers than win new ones or, as Freedman puts it: "Resellers need to pay attention to 'farming' as well as 'hunting'. They should conduct a review of their key strategic accounts and ways to develop them."

High-growth specialist areas, such as storage, security and convergence, often generate new business from existing customers, says Gupta. "The majority of VARs will already have a core competence in, say, accounting or ERP," he says.

"But many miss other opportunities within their customer base. The ultimate aim is to become the preferred supplier for every last piece of IT."

Round's advice is to think bigger. "Often sales for VARs are product- and possibly project-driven," he says. "The challenge is to think more about the infrastructure and the flexibility a solution needs beyond the quick-win sale. This will take more time, but building those long-term relationships is key."

XMA is investing in contact management, accounts planning and territory management. It is also sitting down with customers to talk about their business drivers, and how, or whether, XMA can help. "You have to make the investment, otherwise when you come out of recession you won't be up and running," says Sjenitzer.

Cooper says: "If you come through an economic downturn with your original customers plus some new ones, it's testament to your customer support, and makes a perfect story to win over potential customers when things improve."

If you must find new customers today, either use the 'ripples on a pond' principle, finding companies with similar characteristics to your existing customers, or merge with a reseller with a customer profile that complements yours.

Form partnerships
An alternative to merging is to form partnerships. "Two Alcatel resellers, Freedom, which has a voice background, and Memorex, with a data heritage, have worked together to sell converged voice and data solutions," says Evans.

"They saw this partnership as preferable to each investing in the skills internally."

Your staff may seem a bit of an albatross as they sit around the office during the recession, but you won't half need them once the economy picks up. By then it may be too late to recruit easily, so it pays to be good to people even when times are rough.

Be upfront about how bad things are, and if you have to make people redundant, do it quickly and do it once, otherwise staff will live in permanent fear for their jobs. Pay cuts may be a softer option, as long as you lead from the top and take a cut yourself.

You can also use the slack time to get staff trained so they're more use in the recovery. This assumes you know what skills they'll need, so you need to keep an eye on market developments.

This is something resellers aren't always good at, according to Steve Wheeler, sales manager at vendor RSA Security. "Resellers should look at new trends developing in the channel. This is common for vendors, but resellers tend to look to the distributors for support," he says.

In such uncertain times, nothing can guarantee a reseller's survival.

But those who manage their finances, know their business and look after their customers and staff at least have the best chance of being fit for the recovery.

Contacts:
Accpac (020) 8622 3033
www.accpac-europe.com

Albany Software (01420) 547 600
www.albany.co.uk

Alcatel (0870) 903 3600
www.alcatel.co.uk

Computer 2000 (0870) 060 3344
www.computer2000.co.uk

e92plus (0870) 200 9292
www.e92plus.com

Eclipse Computing (020) 7680 0650
www.eclipsecomputing.com

Huthwaite International (01709) 710 081
www.huthwaite.co.uk

Hydra Solutions (020) 7337 2777
www.hydrasolutions.com

KTSL (08700) 275 587
www.ktsl.com

RSA Security (01344) 781 000
www.rsasecurity.com

Stonesoft (0118) 988 0270
www.stonesoft.com

Wick Hill (01483) 227 600
www.wickhill.com

XMA (0115) 846 4000
www.xma.co.uk