Every day counts in the race to collect cash. If your aging report averages 45 days or
more, you may be missing some important steps along the way.
Slow-paying customers and slim operating margins are a bad combination, especially in a capital-intensive business like trucking, but it is a reality that fleets face every day. To speed up cash flow, managers must continually work to reduce their days sales outstanding (DSO), or the number of days it takes to collect cash after completing a load.
DSO has internal and external cycles. The time it takes you to present an invoice to a customer after delivering a load is internal DSO. External DSO is the time it takes for your customers to pay after receiving an invoice. Shortening either cycle by even one day can have a significant impact on cash flow. Vortex Truck Lines, an 85-truck, Oakland, Miss.-based truckload carrier, for example, brought in an additional $90,000 by reducing its internal DSO by three days based on its average daily sales of $30,000, says Tom Fowlkes, chief financial officer.
Like many carriers, Vortex Truck Lines improved its cash flow through technology. Document imaging helped the carrier cut three days off its internal DSO. The company has also made improvements to cash flow through consistently monitoring credit to avoid slow paying customers and by closely following a graded serious of actions to collect, Fowlkes says.
“Brokers, if they’ve ever dealt with our company, understand quickly that I mean business about paying us.”
Ounce of prevention
One of the best ways to improve cash flow, Fowlkes says, is to be very selective in who you do business with. Like thousands of other carriers Vortex Truck Lines subscribes to a credit monitoring service that specializes in transportation. In addition to the usual general business credit advisory services, transportation credit services, such as CompuNet Credit Services and TransCredit, collect information on brokers and shippers.
Overall, cash flow is everyone’s responsibility, not just the CFO or controller, says Conner Burns president of Burns Management Advisors, a management consulting firm specializing in transportation. Since operations personnel are typically the ones who ultimately decide who to book freight with, Fowlkes says he requires dispatchers to pull a credit report on a new customer before extending credit to ensure that credit quality remains consistent.
“We use TransCredit because they provide a credit score, which we use to easily instruct dispatchers what credit score we will accept. We only use those that pay within terms,” Fowlkes says. “The biggest cash flow benefit we have is to not do business with people with a history of slow pay.”
Dispatchers at Dixie Midwest Express use CompuNet to obtain credit information on potential customers, says Cynthia Lavender, controller of the 55-truck carrier based in Decatur, Ala. Based on this credit information, the company avoids brokers that average above 45 days, and those that have had carriers file on their surety bond or do not have a bond on file at all.
Avoiding customers with a history of slow payment may indeed have the biggest impact on your cash flow. Another area that carriers can tightly control is internal DSO. Using overnight or two-day delivery service such as FedEx, United Parcel Service or TripPak Express can cut paperwork delivery from seven days to one or two. Some carriers have cut out mailing costs altogether with document scanning and eliminated the bottleneck of paperwork arriving at the office.
Drivers for Vineland, N.J.-based National Freight Inc. (NFI), for example, deposit trip envelopes in TripPak Express boxes at three of NFI’s terminals or at truck stops with TripPak Express drop boxes. Drivers also have the option to hand their documents to cashiers at over 1,500 truck stops that have TripPak Scanning or to scan in the documents themselves at NFI’s terminals. TripPak Services, an ACS company, also offers TripPak Online.
NFI’s paper documents are sent via TripPak Express to ACS’s Wilmington, Ohio, data center and scanned and indexed. The scanned images are combined with the other scanned images as part of the TripPak Online service and linked to NFI’s enterprise software system through the Internet. By centralizing the company’s document management through TripPak Online, images are available by the next business day to begin the rating and billing process, says Frank Raschilla, chief financial officer.
“We’re picking up a day to two days on that cycle,” Raschilla says. “It gets our billing out faster, which gets us paid faster and gets the drivers paid faster. It helps all around.”
Vortex Truck Lines cut internal DSO by three days after implementing an in-house imaging system from McLeod Software in combination with Transflo Express, a truck stop scanning solution at Pilot Travel Centers from Pegasus TransTech. Because of the efficiencies gained by imaging documents, Fowlkes says the company no longer does business with brokers that require original paperwork. Although this new policy effectively removed 15 brokers from Vortex’s list of customers, Fowlkes says that a faster collections cycle made the decision to exclude some brokers well worth the loss of business.
In order to speed external DSO, or the time customers take to pay after receiving an invoice, fleets say that consistency and meaning what you say are the best collections tools available.
Before you mail out the first invoice to a new customer, consider making a “pre call” to verify that all the information is correct, and ask if the customer needs any additional information that you could forward on with the bill, advises Alex Soutter, controller for Portland, Maine-based PAF Transportation, a 75-truck carrier.
“I do that before it becomes an adversarial type of conversation,” Soutter says.
Sending a reminder to customers before an invoice reaches 30 days can also be an effective way to politely initiate communications, Dixie Midwest Express’s Lavender says. On Fridays, Lavender runs an aging report to locate invoices at 25 days out. She then faxes reminder notices of invoices coming due with a reminder of the 30-day credit limit. The reminder also asks customers to check their records to make sure that they have everything necessary to process the invoices in a timely manner, Lavender says.
On the following Friday, if Lavender has not received payment, she sends an urgent notice that the invoice is past due and to please respond.
“Ninety percent of people who did not respond at 30 days will respond to an urgent request,” Lavender says. If by the next Friday they haven’t responded to the urgent notice, Lavender says she calls them every day until she gets an answer. Overall, her collections process has resulted in 31 DSO, she says.
Software can help alert mangers to problems before they develop. Maddocks TruckMate for Windows, for example, recently developed a Cash Flow module that determines every individual customer’s unique payment methods and timing. The module projects when future payments will be coming through the door, says company president Bob Maddocks. “We can also determine which receivables ‘should’ have come in last week, and provide concise lists of clients and invoices to follow up on,” he says.
Even with timely and persistent collections policies, some accounts may routinely stretch past 45 days. When this happens, you may consider quickly placing the account on credit hold to prevent further late payments.
“At some point, if there is problem with payment, as opposed to information, it doesn’t take long for us to put them on credit hold,” says Barbara Leisure, chief financial officer of James Brown Trucking, a 200-truck carrier based in Lithonia, Ga. Every two weeks, a James Brown Trucking committee meets to discuss which customers should be placed on credit hold. “Our greatest power of collecting is if they need something, and they need it now. We will demand a check to make up any past due amounts before we pick up a load.”
In addition to quickly halting a customer’s credit, sticking to a firm date of turning over past-due invoices to a collections service can be an effective deterrent to make customers pay up.
“We turn over to collections at about 60 days,” Fowlkes says. “Most people that we turn over to a collections agency are refusing to answer the phone and are considering going out of business. If I can be one of the first people to turn into collections and collect before they close their doors, I have a better chance of seeing some money.” Having a firm date when accounts will be turned over to collections – and adhering to it – lets customers know that you mean what you say.
“We take it very seriously,” Fowlkes says. “We don’t make idle threats.”
If you routinely struggle with collecting your money in less than 45 days, perhaps its time to recheck your system from top to bottom and to weed out a few slow-paying customers. In addition to straining cash flow, slow-paying customers ultimately are unprofitable. A $500 load with a three percent profit margin, for example, will lose most of its $15 profit by the time you fax paperwork and make phone calls to collect past 30 days, says Burns.
“You really don’t need to do business with anyone who pays over 40 days.”
For more tips and tactics for managing cash flow, see the Commercial Carrier University manual How to Manage Cash Flow, available online at this site. Chapter 6 deals specifically with accelerating cash collections.
Also, the Truckload Carriers Association recently presented an audio conference entitled “Freight Charges – How to Collect Them and How to Keep Them.” For information on purchasing an audio cassette of the program, visit this site.
New ways to leverage receivables
Hybrid programs can save over traditional factoring
With a surging economy and an upward swing in equipment valuations, many carriers are improving their financial strength. If you currently use a factoring arrangement to generate cash from invoices, perhaps the time is right to consider a less expensive means to get cash quickly from invoices: an asset-based working capital program. Some banks have “hybrid” programs to help carriers make the leap.
Vortex Truck Lines uses an asset-based line of credit from its bank that allows it to borrow up to 80 percent of its accounts receivables, says Tom Fowlkes, chief financial officer of the 85-truck, Oakland, Miss.-based carrier. Its working capital program allows Vortex Truck Lines to retain ownership of its accounts receivable, as opposed to selling its receivables to a factor, Fowlkes says. The asset-based program essentially works like overdraft protection on its checking account, with interest charged on the average daily loan balance each month. Checks from its customers are sent directly to a bank lockbox and applied to the loan.
Transportation Alliance Bank (TAB), a bank that deals exclusively with the trucking industry, offers a hybrid factoring arrangement, says Tim Valdez, president of TAB. Circleville, Ohio-based 1st Carrier Corp. uses this arrangement from TAB. Instead of mailing invoices to TAB, as it did with a previous factoring company, the carrier enters its invoice information into a spreadsheet, which it uploads information daily, sorted by customer, by customer code, invoice number and amount, says Jeff Lanman, president of the 75-truck carrier. TAB wires money into its bank account the same day.
1st Carrier Corp. scans supporting documentation and invoices into a Web-based document imaging system from TON Services. Using the document imaging service eliminates the need for the carrier to mail paperwork and to make copies for its own records, Lanman says. Like a factoring arrangement, TAB handles the billing and collections, and payment checks from 1st Carrier Corp. are sent to TAB and applied to outstanding invoices. Instead of charging a factoring fee, Lanman says that TAB charges an interest on outstanding balances. Another benefit is that TAB allows Lanman to apply payments directly to its Flying J fuel account without incurring any transaction fees to wire money, such as wiring money to a fuel card vendor.
Although a factoring arrangement or working capital program can ensure that cash is available, becoming too dependent on a factor or credit line has spelled disaster for some carriers. After all, having a credit line is like using a credit card to get by when your bank account runs dry. Without sound cash management, you can dig a hole that you may never get out of.