If fuel price volatility has your cash flow looking and feeling like Mr. Toad’s Wild Ride, you are not alone. Your fellow marketers across this great country are equally concerned with wide swings in cash. In a single day, I’ve had a phone call from a marketer frustrated at having to pay a supplier quicker than his contract terms because he had maxed out his refiner’s credit line, and another marketer calling to ask about high-yielding short-term investments because he had millions he needed to put somewhere for about a week. Either one is a tough pinch to be in, even though both are only temporary.
If you want more control over your company’s cash flow, if you want to turn huge cash swings into just minor curves, then take these ten steps:
It’s vitally important to your cash flow that your credit line from each of your refiners be large enough that you don’t ever have to pay a bill before it is due. Since no refiner I know sets line limits based on gallons (they use dollars), as prices rise, have your staff monitor the gallons available for purchase within your line limits. Take steps to increase your line before you bump any refiner’s limit.
Often a simple call to your refiner’s credit department is all that will be needed to have your line increased. Other times, you may reach an uncooperative or resistant credit person and may find it advantageous to involve your local or regional refiner sales team. I’ve seen only a few marketers refused larger credit lines. Those were companies that in my opinion were over-leveraged. In other words, their net worth was not worthy of a larger line. Therefore, if you want to avoid refiner credit hassles, monitor your net worth as a percent of total assets and don’t let it fall below 25%.
The longer the time between when you pay your refiner and your customer pays you, the more demands you will have on your cash flow. When prices are rising rapidly, the marketer with the longest terms loses the cash war. If you already collect from your customers by EFT, you are perfectly positioned for a smooth transition to shorter terms. Just select an effective date for the change and notify your customers.
If you are not yet offering EFT, this is a great time to start. Use an inducement, an ethical bribe, that can be as simple as allowing new EFT accounts to remain on your old longer terms while those that want to continue with check payment must adhere to your new shorter terms. If that doesn’t do the trick, many Meridian clients report success offering customers who switch to EFT a dollar amount of credit off their next fuel bill upon conversion to EFT, typically $25 to $50 off. When you do the math, you come out way ahead even with this credit.
3. Get Customers to Pay on Time.
The easiest way to make sure you get paid on time is by requiring EFT or drafts. Although this may sound like a giant leap, especially if you have old ag accounts, take it step by step. First, require EFT on all new customers. Your customer application should make this easy. Then, strategically convert old accounts over time. If you deal with residential heating oil accounts, the only thing better than being paid on time is being paid in advance! Monitor and try to increase the percentage of residential customers you have on budget billing or prepaid accounts.
Fuel, of course, needs to be managed based on price trends to maximize margins. For non-fuel inventory, though, get lean. Use just-in-time buying approaches to conserve precious cash whenever possible. If you own a warehouse, take a walking tour. It’s amazing what you’ll spot just from a quick walk through. Then, check out your inventory accounting reports. If you use minimum and maximum inventory levels, have staff reanalyze those targets. Could they be cut by one day’s supply or more without interrupting customer service or sales?
Because this volatile environment can create a cash demand literally overnight, it’s critical to pay attention to your debt management. If you never get your bank’s revolving line of credit paid off to zero for even one day, consider converting a portion of that line to a term loan to free up working capital. Most marketers, at some time or another, used their bank line to purchase equipment or other capital assets. If you’re guilty, secure the new loan with those assets while making sure your bank keeps your original revolving line at the pre-term-loan limit (some bankers try to reduce your revolving line by the term loan amount which defeats your purpose).
To minimize interest expense, your checking account cash at end of each day should automatically pay down your bank line. If you are flush and the line is at zero, that cash should go into an interest-bearing overnight account automatically as well.
As an ex-banker, I know the financing ropes! Many Meridian clients, especially those who have attended our Focus on Finance live event where we discuss the ins and outs of banking, tell us they achieved major savings in loan interest, fees, checking fees and cash management services, even sophisticated clients who thought they were doing well with their banking negotiations. Call my office today at 800-728-9005 and ask for our free report, “How to Get the Best Bank Deal”which gives you inside information so you can get your best deal and save even more, too.
During times of cash stress, purchase only those assets that will make you even more profitable. Even if you are debt averse, use 75% financing when you buy those new assets. This goes for stores, trucks, equipment, other jobbers, anything. You may have the cash today to pay for the entire purchase, and think paying interest is a waste of money, but unless you are absolutely certain you can meet all future cash demands, you’ll be glad you used conservative financing. And, you can always pay off the loan early.
7. Recapture Deposits
You know that balance sheet you sometimes ignore when staff prints out your financials? Retrieve it from your file cabinet and scrutinize the asset section for any deposits (your cash with vendors). If there are any, make phone calls to have those deposits released. I had one client make one phone call that freed up $300,000!
8. Negotiate Longer Supplier Payment Terms
Try asking for extended terms from your suppliers. Some might surprise you with a yes!
9. Fire your unprofitable customers.
Every business has customers they inadvertently lose money on. If you have any thin margin, slow pay accounts that aren’t going to change their ways and you know you just won’t be able to keep them if you raise margins, raise them and let them go. Especially during times of cash flow stress, keeping them is masochistic! Why should you lose money on these turkeys?
10. Don’t cut marketing spending or shy way from growth.
When cash flow cycles have you reeling, when you go from barely scraping up enough cash to pay a big expense like tax or payroll one day, to not knowing where to park all your cash on another, you may feel like you should get less aggressive with growth and take a breather. Don’t. If you’ve completed the other nine steps, your cash will be fine and the absolute best thing is steady, firm resolve on your growth path. If you try to slow down or stop and take a break, you could inadvertently crack the door open for a competitor, and they just love it when you open that door for them. Even with the companies I’m helping sell right now, I always advise owners to continue to run the business like they’ll own it the next ten years. Keep growing!
In summary, today’s fluctuating fuel climate is going to test every marketer’s cash flow skills. If you want to turn Mr. Toad’s Wild Ride with it’s subsequent heartburn and indigestion, into something a little more tame like the Merry-Go-Round, act right now on these ten suggestions.