If you are in the wholesale sector of the industry, there is nothing more critical to your cash flow than your receivables management. Every $100,000 in outstanding receivables is costing you approximately $10,000 per year in interest and staff costs. (Even if you don’t use a line of credit to support your receivables, that money could to to mortgage or equipment debt!) In load by load terms, any customer who pays you 15 days past your supplier terms on a full load equates to a cost of about 0.42 cents. If you are only making a half-cent over freight, customers who pay 15 days or more past terms are eating up your entire profit! Because of the enormous cost of receivables and typical lack of effective management at most petroleum companies, we try to cover this subject in at Meridian at least once per year. What follows are the strategies to drive your company to highly effective receivables management. Play by these rules, and you can add as much as six figures to your bottom-line.
1) Only target prospective accounts with good credit history. This is a little trickier than it may first appear. Notice this statement assumes that you actually credit check a customer before you target them for a sales call. This means that your sales force must be organized enough to know in advance who they want to call on and that you have in-house ability to pull credit information on commercial customers through your PC. (Please note that credit checks can only be made on corporate accounts without express permission. It is expressly against the law to pull credit on individuals without their consent on an application.) A side benefit to pulling credit on a commercial account before the first sales call is the wealth of information you can get from the report to prepare for a more effective first call. Most credit reports contain ownership and site information as well as financial data.
2) Check references provided on your application application. We have covered effective application forms in other articles available on www.PetroAnswers.com, so will not delve into that here. It’s vital, however, that the information the customer provides be verified with particular attention to bank and trade references.
3) Set the correct credit limit.
4) Review your terms and shorten any you can without losing customers. Calculate one day’s credit sales for your company (monthly sales on credit terms divided by 30 days) and you will know what a major impact you can make by changing your terms. Think in small incremental steps. Moving from 30 day to 15 day might be too much for your customers to tolerate, but moving from 30 day to 25 day might work, or from 15 to 12, etc.
5) Insist on EFT collection terms on all new accounts. There is no reason in this day and age why you can’t collect by EFT. If you have yet to make the plunge, start with one or two very loyal customers and give them some perks for being your beta test site. If you own more than one company, another slick way to get started is by starting EFT internally — collect from your other companies and make your mistakes with them! If you need help with EFT, your bank and your petroleum software vendor will usually be very helpful
6) Convert all existing accounts to EFT. Once EFT is running smoothly, and all the new accounts are going onto this collection method, convert the old customers. Entice them with slightly longer terms than they presently have now. The reality is that even adding two days to terms, you will still have your money in the door more quickly. Most companies find at least a four-day speed-up when they go to EFT.
7) Check your billing system efficiency. You want customers to get accurate invoices as soon as possible. Efficient companies are already moving away from paper invoices and going to electronic means. An satisfactory interim step is a an automated fax billing system. Electronic systems are much more cost-effective than traditional “print the bill, fold, stuff, pay for a stamp and mail” systems. If your billing accuracy is less than stellar, track your billing errors to pinpoint the problem(s) and fix them! Customers won’t pay you quickly if they don’t believe your invoice!
8) Involve sales people in collections. Ideally, pay your sales people at the time money is collected rather than at the initial time of the sale. Before plunging into this pay method, check with your GL vendor to be sure their system has the capability to issue commission reports in this manner. If you can’t pay on a cash-received basis, at a minimum notify your sales person when an account is delinquent. They are often a softer first-touch than your credit people. The great thing about EFT collection is you find out immediately about a funds problem with a customer.
9) Stop serving delinquent accounts. If a customer doesn’t have the money to pay you, and isn’t making a satisfactory arrangement to do so through the salesman, stop serving them! You’ll just have a bigger bad debt write-off. Of course, the difficult task after reading this list is to have the courage to actually do them. Just remember this old saying, “If you keep on doing what you’ve always been doing, you’ll keep on getting what you’ve always got.” It may help spur you on!
Implement all nine steps and your cash will be flowing in the door!