Chapter 6 -
Accelerating cash collections

One way to generate more cash without dispatching a single additional truck is to speed up collections on your receivables. But collecting the money owed to your trucking company can be one of your biggest hassles. Concentrate on increasing the speed of your billing and collections processes and reducing the days necessary at each step. Make it easy for your customers to pay and for your money to get to the bank quickly.

This chapter focuses on your internal collections process rather than on how to hire a strongman to bring your money in faster. That process might work once, but most customers don’t respond well to beat ’em up techniques.

Reduce the A/R cycle
Recall from Chapter 4 the need to chart the length of your accounts receivable cycle in days. Speeding up collections is all about reducing that cycle. Every day you eliminate could mean thousands of dollars.

For every $1 million in annual business, each day’s sales is about $2,700 ($1 million divided by 365 days). If you average 45 days to collect, then your A/R would be about $121,500 for every $1 million in revenue ($2,700 times 45 days). But if you can reduce that cycle by 15 days, you can reduce A/R to just more than $81,000 and pocket a one-time bonus of more than $40,000 for every $1 million in revenue. On a $5 million operation, that’s more than $200,000.

Unfortunately, the opposite is also true. If your collection period grows, expect a drain on cash. Going from a 30-day average to a 45-day average on A/R will drain more than $40,000 from your cash flow for every $1 million in revenue.
Let’s break down each step of the process from the accounts-receivable cycle and examine ways to reduce the time in the cycle.

Delivery of goods
Your driver delivers a load and obtains a signature on the bill of lading. At this point you are free to begin the collections cycle, and you should do so as soon as possible. Delivered but not-yet-invoiced loads are often tracked on an “Unbilled Loads” report. Work to measure and reduce the total days each item stays in this category.

In many industries, you could begin the collections cycle immediately upon delivery because the receiver of goods is the paying customer. In trucking, however, your customer typically is the shipper, so you usually can’t simply provide an invoice upon delivery. In most cases, you must have the signed paperwork to bill the shipper, and your driver could be on the road several more days.

Drivers should provide a facsimile of the delivery documents as soon as possible. Faxing often produces illegible copies, but you have other options. Many truck stops now have either scanners that allow drivers to e-mail digital images or TripPak drops, allowing for express package delivery.

The bottom line is to get the invoice into the customer’s hands as soon as possible. This simple process could cut up to four days from your cycle.

Also, make sure the invoices are correct to the finest detail. Have all details spelled correctly and the proper person’s name on the bill. You want to make it as easy as possible for your customer to process the bill. Remember, your customer may not time his disbursements (discussed in Chapter 7) immediately, and he might pay the bill. Cut out the snail mail and any possible reason for the customer to question the invoice. Eliminate any excuse not to pay you.

Creating the invoice
Make sure your invoicing process is clearly defined, repeatable and gets daily attention. Use simple checklists to make the process as easy and foolproof as possible. Define your system based on the requirements of a majority of customers. If you are systematized with the majority, you will have more time to handle the exceptions.

In most small businesses, the person who handles invoices also pays bills and makes deposits. If this is true in your operation, make sure the priorities of the job are clear and easy to carry out. Always make deposits first and then create the invoices. Last, pay the bills. You want to keep money in the bank for as long as possible.

Sending the invoice
Automate the invoice process and try to avoid the post office. Some customers may accept an invoice as an e-mail attachment. Some shippers require that their supply chain partners use electronic data interchange, allowing you to exchange forms of information with them very quickly. Traditionally, using EDI has required a substantial outlay for dedicated communications. Now, many EDI vendors offer secure Web forms so that you can use EDI with little more than an Internet connection. Subscribing to the service remains a significant expense, however, so it’s most economical if you have multiple customers using EDI.

Receiving payment
Receiving and processing the payment is, of course, your ultimate goal. Include self-addressed envelopes to speed the payment and ensure it gets to the right place. You can also skip the entire mail system by having customers send payments straight to your bank account lockbox, which is discussed further in Chapter 14. The bank will send you a notice of the receipt. Using a lockbox could make funds available to you up to three or four days earlier than if customers sent payments to you.

If you have no option but to receive a check in the mail, do everything possible to speed up the process. If, for example, you receive a check in an amount that doesn’t quite square with the invoice, deposit the check first and ask questions later.

Many companies have very complicated collection-handling procedures. This is where you can reduce red tape. At the very least, don’t overwhelm the person performing these tasks. If possible, dedicate a person to handle receivables or at least to handle financial matters. Some companies make the collections person answer the telephone, deal with driver problems and run errands. If this person is distracted, you may be increasing your accounts receivable cycle by a few days, costing you a lot of money.

Automate your accounting system
Are you using old or cumbersome bookkeeping systems? Consider investing in an automated accounting package to speed up this process. Integrated packages are getting easier to use, but still require time and discipline. Software alone will not solve your problem, however. Invest in the training and top-down supervision to ensure that someone measures and monitors critical processes. Have an accountant help with this process.

Use the fastest bank
Banks process deposits at different speeds. Some have same-day capability, and others may take up to three days. Many trucking companies take for granted that when they make a deposit the funds are immediately applied. Using the wrong bank may cost you three days.

The words you are looking for are ACH or EFT. ACH stands for automated clearinghouse, and EFT stands for electronic funds transfer. These acronyms mean the bank has invested in computer systems and networks that will handle your funds in the quickest manner possible.

Set creative credit terms
Consider offering a discount for paying early. A common discount is 2 percent for paying within 10 days, with the full amount due within 30 days if the discount is not taken. Most customers should take advantage of this discount, as it equals a 36 percent interest rate (365 days/20 x 2 percent) for the foregone 20 days. Of course, you must determine for yourself whether having the cash earlier is worth paying this kind of interest.

Discounting has its place, but use it wisely and understand the true cost of your cash. Realize that large customers may take the discount and still pay you later. You’ll need the fortitude to ensure that you grant discounts only to customers who earn them and to enforce agreements if people start taking advantage of you.

An alternative to discounts for early payment is charging interest for late payments. If your freight bill calls for payment within 21 days, for example, you might state on the bill that late payments are subject to a penalty of, say, 1.5 percent per annum. Although many shippers realize that you are in a weak position to enforce collection of interest, many clerks, especially at third-party agencies, may be influenced by such a potential penalty.

Audit your own systems
Periodically, monitor your own system of handling checks and processing cash. Even though you might have control over your systems and processes today, it always happens that one person may get out of the routine. You should have a quarterly or annual check to make sure that all practices are seamless.

Know bank and post office deadlines
Most banks will post all deposits made at or before 2 p.m.; transactions after 2 p.m. will post the next day. If you continuously deposit after 2 p.m., you may be losing valuable days of interest and days to have your funds available. Ask your bank when deadlines are for depositing funds and having them post the same day.

Also, learn when your mail is delivered and picked up each day. If possible, make sure your mail is delivered in enough time to process your deposits and get them to the bank, since every day counts. In addition, don’t wait until late in the afternoon to create invoices, because they sit in the outbox in your office and wait for the next day’s mail. Take the letter to a drop-off point or change your procedures for creating invoices.

In Summary
Collection techniques will speed up your accounts receivable cycle and help you benefit from having your money sooner. As explained in Chapter 4, review your cash cycles regularly and measure them in days. Every day you can cut out of the collection or revenue cycle can put thousands of dollars in the bank each year.