Commissions: A Bird In Your Hand or Two in the Bush?
The Advantage of Now vs. the Costly Risk of Waiting
By Jake Cantrell
Whether you learned it the first year of business school or along the way in your career, a core principle of finance is rooted in the time value of money. Said another way: A bird in the hand is worth two in the bush.
As the calendar turns to 2017, it has the tangible feel of a transition year for the retail energy industry. Driven by increased competition, declining margins, rapidly evolving technological advancements, and a limited number of new customers, retail electricity providers (REPs) and aggregators, broker, consultants (ABCs) have turned to forward-start agreements to maintain growth projections. This trend is good for end users because it allows them to lock in historically low energy prices for the next five or more years. For REPs, however, it has increased their credit risk, market risk, and cash flow risk, dampening the viability to continue to prepay commissions on contracts that won’t generate any revenues for several years.
Channel partners are beginning to feel the squeeze from margin compression and dwindling up-front cash payments in a market where more and more end users are fully contracted through the liquid horizon. All market indicators point toward this trend becoming the new normal, which means channel partners will need to sell much more in the future just to earn the same amount.
Discouraging, right? It doesn’t have to be.
New opportunities have emerged for ABCs to monetize their commissions now instead of waiting months or years for payment. This is particularly encouraging in a business environment where (i) growth is shifting toward a mergers and acquisitions model, (ii) customers are locked into contracts long before their existing contracts expire, and (iii) margins are shrinking. Those who will win in the end are creating economies of scale by leveraging their balance sheets now to stay ahead of the curve vs. sitting idly during a period of margin compression and as favorable liquidity options narrow.
Just as monetizing commissions now offers a path to success, the path to significant potential loss is waiting idly for those commissions to be paid, however long the wait may be. The cost of waiting can actually be a backward step, particularly in a highly competitive market. Sitting still in stagnation is a front-row seat for getting left behind, whereas leveraging forward commission payments puts money working toward your success now.
Human nature is such, particularly in issues associated with finance, that people think about the cost of taking action, not the cost of waiting. In the case of retail energy sales commissions, there’s a true cost of waiting for your commission since cash is part of a future equation — oftentimes a very, very long-term future equation — instead of the present.
Given the current environment, now is the time to have an aggressive growth strategy and monetize your future sales commissions before margins shrink. For REPs, that means identifying partnerships that empower their channel partners to succeed. For channel partners, it means seizing unique opportunities to invest in their businesses by leveraging forward residual commissions.
Growth capital through a trusted financing partner will be 2017’s bird in the hand for REPs, ABCs and savvy professionals that recognize the cost — and risk — of waiting.
About the Author
Jake Cantrell has spent over a decade in the commercial lending and wholesale energy trading markets focusing on risk and finance. He joined The Commission Exchange (thecommissionexchange.com) as Chief Financial Officer in 2016. The Commission Exchange was founded in 2015 to address the growing cash flow gap between commissioned contracts and residual payment structures. The Commission Exchange has become a go-to resource for REPs and ABCs for viable, innovative options for immediate payment of forward commissions.
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