Part 2 of an 8 part series by ChannelCorp
As we all move into challenging economic environments, we need to understand business partners’ operating cash cycles (OCC). You need to understand this whether you are a channel partner or a vendor or a distributor . . . and it does not matter what your job is. Fear in this environment will paralyze you. Master the reduction of operating cash cycles and duration. Understand how to do more with less cash, or more with the same amount of cash.
Businesses require cash as fuel to survive, sustain and grow. Business partners will not fail because they run out of sales or have too many expenses. Business partners will fail because they run out of cash. In order to expand or grow a business partner, more cash has to be provided as fuel. In order to survive a business must continue to generate sufficient amounts of cash. Sources must be equal or greater.
There are three sources of cash in a business partner’s company:
- Debt – borrowed cash
- Equity – cash from stock sales
- Internally generated cash from profits, lower expenses or the unlocking of non-cash assets to generate cash
Vendor and distributor programs that reduce partners’ investments in inventory, shorten collection periods and/or extend partners’ payment terms for product are sources of cash. These important programs allow a business partner to unlock the cash traditionally invested in these assets. For example, an account receivable is essentially a loan to an end user to purchase products and services. End user leasing serves to reduce the amount of cash “invested” in accounts receivables therefore unlocking cash that can be put to other “investment” uses within the business. It is crucial that all involved in the industry know how to use vendor and distributor channel programs to assist channel partners reduce the cash required to generate a gross margin dollar.
The operating cash cycle (OCC) – see Figure 1 below - is the clearest way to zero in on the potential impact that vendor and distributor financial programs can have on the cash position of a business partner. A business partner’s OCC represents the amount of time that a company’s money is tied up in inventory, accounts receivables and any other current assets before the company is paid for the products or services sold. The shorter a business partner’s OCC, the faster the company can redeploy its capital to grow. In addition, reductions in OCC can result in lower cash requirements per revenue dollar, higher amounts of growth financeable with the same amount of cash invested and higher levels of return on invested capital (ROIC). It is safe to say that anything that can be done to reduce a business partner OCC should be examined by the business partner senior management in concert with their vendor or distributor account manager, channel manager, or partner manager.
The business partner’s OCC and the duration that the company’s cash is tied up are driven by a number of factors:
- Accounts payable period – how long vendors or distributors give business partners to pay their bills (or how long business partners take)
- Inventory holding period – how long business partners hold inventory (if at all)
- Collection period – how long it takes business partners to get paid for goods and services sold and delivered
Source: ChannelCorp
Figure 1 combines the three factors to provide the OCC and duration.
The table below (Figure 2) will illuminate the impact that these factors have on the OCC of business partners and the duration for which cash is tied up. The formula is: inventory holding period + collection period – accounts payable period
| Inventory Holding Period | Collection Period | A/P Period | OCC | Duration | |
| Typical Business Partner | 20 days | 50 days | 30 days | 70 days | 40 days |
| Excellent Business Partner | 5 days | 30 days | 40 days | 35 days | 5 days |
As can be seen in Figure 2, there is a tremendous difference between the OCC and the duration between typical business partners and excellent business partners. The collection period and its reduction are a major driver in values of the OCC and the duration that cash is tied up. The OCC of the excellent business partner is less than 50% of that of the typical business partner. What this means is that the excellent business partner requires less than 50% as much cash to support a dollar of revenue as the typical business partner. In fact, the excellent business partner, with a duration of negative 5 days, has a theoretical internally financeable rate of growth of infinity and no requirement for outside cash.
What is clear in Figure 2 is the impact on OCC and duration made by the reduction in inventory holding period and collection period, and increases in accounts payable period.
By Bruce R. Stuart, President of ChannelCorp
Partner Growth Conversation 1 was featured in Asian Channels May 2009 issue. To download the article, please click here: http://www.mediabuzz.com.sg/asian-channels/may-2009/470-partner-growth-conversation-1-the-fundamentals-and-implications
ChannelCorp ( http://www.channelcorp.com/) is an IT world leading channel economics, partner finance and channel growth consulting and executive education firm. Founded in 1989 by Bruce and Margaret Stuart, 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 http://www.channelcorp.com/. Bruce R. Stuart, CMC, president of ChannelCorp can be reached at 604 263 6811 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
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