Partner Manager Resource Center

Register Here
Channel Matters Blog > October 2011 > Return on Working Capital

Return on Working Capital

by William Vanderbilt
Read 255 times
Rate this item

There is quite a bit of interest in the channel related to "Return on Working Capital" (ROWC) or "Return on Invested Captial" (ROIC).  This is particularly true of distributors.  In reality, as individuals and business professionals we are all interested in maximizing our return on working capital.  After all, we have only a limited amount of cash.  With that cash we have to buy some goods and services, pay bills and, hopefully, make some worthwhile investments with whatever is left over.

Financially speaking, return on anything involves measuring how much payback there is on a particular investment of time, money, effort, resources, etc.  For instance, Return on Assets (ROA) is a measure of how much profit (return) someone or something receives by utilizing the assets (buildings, facilities, resources, etc.) that it has available to it.  Return on Investment (ROI) is a measure of the payback earned on a particular investment.  ROI can be as simple as the amount of interest earned when money is put into a savings account or invested in the stock market.  ROI answers the question, "How much payback do I get when I put money into something?"  If a bank savings account pays 1% interest, I can expect 1% ROI on my investment in that bank savings account.

Distributors of goods are very concerned with two key financial concepts: profit and cash.  They need to maximize profit and minimize the amount of cash consumed to generate that profit.  ROWC, which is a measure of profit (payback) on the amount of cash consumed is, therefore, a key metric for distribution.  To improve ROWC, distributors can increase their profit or decrease their cash consumption requirements.

We are all pretty comfortable with the idea of profit.  Revenue minus expenses leaves margin or profit.  I can increase profit by growing revenue (sales) or lowering expenses.  Sometimes vendors forget to look at the many potential inputs into such a simple equation and think only of the Cost of the Goods Sold.  But the reality is that sales returns, bad debt, freight in charges, and many other inputs can be included in producing a profit or margin.

But just as important, or maybe even more important, than profit to distributors is cash.  Why?  Distributors need cash for two very important reasons: 1.) to hold inventory and 2.) to extend credit to customers.  More volume typically means more cash requirements.  If I sell more, I have to hold more inventory and extend more credit to more customers.  That ties up cash.  Every deal I make may be profitable, but profitability does not always equate to positive cash flow.

Because maximizing profit and minimizing cash requirements are critical to distribution success, distributors have developed variations of ROWC to determine how successful they are as an overall business as well as how the various products and brands in their portfolio perform.  To improve the ROWC that a vendor provides a distributor, the vendor can help the distributor improve the profitability of its products or reduce the amount of cash required to distribute its products.

Traditionally, vendors have focused on maximizing profitability.  That trend should continue.  But wise vendors are working hard to understand how the demands they place on distributors also affect the distributor's cash flow. Extending credit terms to the distributor can provide more cash for the distributor.  Improvements in inventory turns and lowering inventory requirements are additional ways for vendors to help distributors improve their ROWC.  The truth is, there are many impacts on cash flow in any organization and vendors interested in maximizing distributor performance will work with distributors to help their partners maximize profit and minimize cash outlays.

Channel Managers, particularly those that work with distributors, need to spend time understanding ROWC and the points of ROWC impact.  The concept is not all that complex, but many Channel Managers may be concerned that they don't have the financial or accounting background that they believe is necessary to have informed discussions around the topic.  Since ROWC is so important to the success of distributors, Channel Managers that work with distributors must overcome that challenge.

If your channel sales force needs to be better equipped to speak the financial language of partner executives they might benefit from Channel Enablers 'Channel Sales Financials' (CSF) blended learning program. For an on-line overview of CSF please click here

Last modified on 2/27/2014 2:59:48 PM
Trackback URL: https://channelenablers.com/trackback/69f3f2ee-8138-450c-bf42-5f86f06662f7/Return-on-Working-Capital.aspx?culture=en-US

Comments
Blog post currently doesn't have any comments.