Whenever supplier terms are longer than customer terms, a petroleum company gains free cash flow. Only a few savvy marketers, however, are taking full advantage of this concept. To see what is possible let’s look at an example. Here are the facts:
- Wholesale marketer.
- Serves mainly contract and open dealers.
- Supplier terms – net 10 days.
- Dealer terms – EFT 7 days.
- Sales volume – $80,000 per day.
In this scenario, the wholesaler has three days of free cash flow, which equals $240,000. Investing this amount at a mere 5% interest rate nets this marketer $12,000 per year in extra interest.
Now, we used a 10-day supplier in this example, but consider that many jobbers still enjoy 20-day fuel terms. Using this same scenario, the jobber gets 13 days of free “float” which translates to $1,040,000, which invested at 5% produces $52,000 per year. If the jobber uses that same cash to pay down an existing loan or bank line, the savings is closer to $100,000 annually!
With such larger dollars at stake, why don’t more jobbers take full advantage of this free cash? Well, most say that they will lose business if they shorten terms. This was the reason we heard at Meridian from two jobbers in a rural town out West that were still offering 45-day fuel terms! Their grandfathers set those 45-day terms at a time when they had 60-day terms from their suppliers!
Too many jobbers operate out of fear, with outdated, long customer terms, substantially hurting cash flow and profitability. While supplier terms have shortened considerably, they have not moved their customer terms and then wonder why they aren’t as profitable as they used to be. Slim profits aren’t always solely attributable to decreasing gross margins. Often we have to look at our own policies and practices to see if they have kept pace with the times. And most jobbers who have shortened terms have not lost customers!
The next time you have a price or terms supplier change, use that change as rationale for your customers as to why you must change your terms. It’s much easier to say, “Our supplier, XYZ, has just changed . . . and therefore we must change our terms to you – our loyal customers” than to say we just decided today to change our terms because we felt like it!
How short can you go? You’ll have to make that judgment, but we’re seeing many large jobbers go to load-to-load terms on large dealers, all done through EFT. On a 300,000-gallon station, this means a daily EFT draft. Look at it this way; once the dealer has sold the fuel, they have the cash. If they don’t pay you, they are using your cash.
On C&I accounts, most marketers are at 10 days, but the large marketers seem to be moving to 7 days. The majority of marketers are also requiring EFT payment terms on all new accounts and still working at getting old accounts transitioned. Don’t get left behind, or out of extra free cash and profits!