Taking Charge of Accounts Receivable
NW Shippers, Inc. is a regional pick and delivery company with 10 trucks and 2 dispatchers. The business started over 30 years ago as a flooring industry shipping co-op. It became a common carrier when trucking deregulated in the early 90's. NW Shippers primarily services the building and packaging industries and occasionally provides third party carrier services for brokers.
When our trucking company's management team met with our small business advisor to hear their analysis of our financial situation, we were so frustrated we were ready to throw in the towel. Our company was struggling. Although we had plenty of customers, our accrual based accounting system showed revenues were strong and we were making a profit, we were still struggling to pay our bills. We were burning out worrying how we were going to pay our vendors.
What we learned from our advisors made perfect sense, after they explained it to us. No cash was available to pay the bills because our customers averaged over 60 days to pay us for our work. Our first response was "Hmmm, OK, but they do ultimately pay, so what's the issue?" Then our advisors showed us what our financials would look like if we received payment within 30 days. The difference was impressive.
No wonder we were stressed, we had essentially extended loans equaling more than a month's gross revenue without even thinking about it. Because we did not manage our accounts receivable (A/R) aging, we had become our customers' bank. And why not? We did not charge interest; we did not require a lengthy loan application; we did not have a regular review process; and we allowed customers to take as much as they wanted and repay back when and if they felt like it. As long as we did not care if they paid on time, why should they? They could use their cash for more pressing expenditures. If only our customers would pay us what they owed us, we would have more than enough money to pay our bills, reinvest in our business, or even (dare I say?) make a share-holder distribution. So, now we knew the problem, what could we do about it?
STEP ONE: AVOID AGING ACCOUNTS
We set out to improve our A/R aging management. On our path to improvement, we learned the first step is to simply avoid aging accounts by focusing on a quality invoicing process:
Get Invoices Out The Door - If the customer does not have the invoice, we cannot expect to receive payment. Because we are an LTL company and we do mostly small repeat shipments with the same customers, we waited until the end of the month to bill customers. If the customer took 60 days to pay the invoice and we completed the work 30 days prior to the sending the invoice, we were waiting up to 90 days to receive payment. Unfortunately, our vendors and employees expected payment for the expenses incurred moving the freight (payroll, fuel, truck maintenance) way before the customer paid our invoice. Waiting to bill was killing our cash flow. Even though the postage and administrative cost might increase, we needed to get the invoices to the customer faster.
Expect Compliance With Payment Terms - Although our invoices stated due upon receipt, only a few of our customers actually respected the terms of our contract. We had never enforced it, so customers learned over time they could ignore it. We were fearful we might lose customers if we pressed the issue, but our advisors observed, "Do we really need customers who don't pay their bills on time?" Our company would be much healthier if the revenue was smaller and the cash flowed through faster. When we learned, given the current economy, our bank will not look at anything over 30 days as an asset and therefore will not extend credit to us on any overdue payments; we moved beyond our fear of losing customers and began standing by our terms. As it turned out, our fears were not justified. We only lost a couple of accounts and they were the worst at paying on time. To stand by our terms we made several changes:
Communicate Payment Terms Up Front - We learned the first time we do work with a customer we need to ensure they are aware of our payment terms. It was common for us to hear, "We didn't know the payment was due upon receipt. We thought we had 30 days to pay". We now include our terms on rate quotes and on negotiated rate tables.
Offer An Early Pay Discount - By offering an early pay discount, we encourage our customers to pay us prior to paying other vendors because it is in their best financial interest to do so. Admittedly, we do not offer discounts to all of our customers. We learned to base the discount off the individual customer's relationship with us. If they already have negotiated rock bottom prices, we do not reduce the rates even more by adding a discount.
Include A Late Pay Penalty - This was perhaps the most effective and quickest impact on our A/R aging. As soon as we applied a penalty for any payments over 30 days unless the customer arranged other terms prior to the shipment, we noticed an immediate change in a lot of customers' payment behavior. All of a sudden, it was not so easy to use us as their bank. We base our penalty on a percent of the total bill rather than a fixed dollar amount. We chose a percent because it better reflects the impact the late payment has on our accounts receivable. For example, if the overdue bill is $50.00, a $5.00 late fee might be excessive, if the bill is $1500, $5.00 is not nearly enough to encourage timely payment. Our 1.5% monthly fee takes into account the size of the overdue payment. We do apply a minimum late fee of $2.00 to offset our administrative cost for following up on the late payment.
Ensure Accurate Bills - One of the reoccurring excuses we heard from our customers for their late payment was we made an error on their invoice. Of course, some customers waited for us to call them before they brought the error to our attention, which in the past might take us weeks. When the issue was resolved, they generally wanted us to re-bill them. Unfortunately, the time we spent identifying the error, correcting the invoice, and sending them a new one meant additional time passing between completing the work and receiving payment. Inaccurate invoices lead to delayed payments, reflected poorly on our reliability, and cost our customers time and money. We learned we needed to improve the accuracy of our invoices so we could, in turn, reduce the time it takes our customers to pay, show our customers we are reliable and professional, and we care about helping them reduce their administrative costs.
STEP TWO: MANAGE AGING ACCOUNTS
Even with a well-designed and implemented invoicing process, it is inevitable some accounts do not receive immediate payment, so we also learned how to address accounts once they started aging. Here is what we discovered:
Review A/R Aging Frequently - As we studied how to better manage our aging accounts, it became clear, in the trucking industry, at least a weekly review of A/R is critical. Most all of our customers are suffering from reduced business and poor cash flow due to the economic downturn. It is only a matter of time before some of these businesses find out they cannot make it through the downturn. The less money owed to us as a service provider, the less we will feel the impact if a customer does not survive. It is critical now more than ever to get payments in the door upon completion of the work. If payments are overdue and we are still providing service for a customer, we are at risk for losing more money with every transaction.
Make Immediate Contact When The Payment Is Late - Our experience has taught us the older the payment the harder it is to collect. Once a payment is over 90 days, it is almost impossible to collect. Acting quickly by contacting the customer for non-confrontational discussion when the payment is only slightly overdue keeps the conversation positive, allows for us to understand if we can make an adjustment to help the customer, and helps us understand if there is going to be a big issue collecting the money.
Do Not Be Afraid To Change Credit Terms Or Even Cut Off An Account - We realized, prior to managing our A/R aging, our dispatchers continued to take orders and dispatch shipments for customers who had not paid in months. We were not communicating as a team. As we let go of our fear of losing customers due to strict payment policies, we learned to apply consistent rules to late paying customers. We created a communication and escalation policy for collecting on accounts. First, we take away any preferred customer discounts. If a customer does not pay on time, they are not preferred. Next, for customers who are constantly overdue with payments and currently more than 30 days late, we require payment in full upon delivery. Finally, if a customer is over 60 days late and no acceptable payment arrangements are in place, we terminate service.
Contract With A Reputable Collection Agency - We always tried so hard to be nice guys. We never sent anyone to collections. The problem was some of our customers knew we did not send accounts to collections took advantage of us. While improving our A/R management we learned: talk with our customers, be congenial, understand their situation, and try to work with them. However, if they are taking advantage, unwilling to communicate, or extremely past due on their account, send them to collections. We opened an account with a reputable local collections agency we can hand off the worst of our accounts to prior to writing off the revenue as bad debt. We may never see a payment, but the collections will end up on the customer's credit history and the threat of a bad credit history makes some customers think twice before letting late payment progress too far.
STEP THREE: FIND TIME TO EFFECTIVELY MANAGE A/R
Considering the incredible number of tasks we manage daily while running a trucking company, we asked ourselves:
How can we continue to focus on managing our A/R aging and still take care of all of the other demands on our time? How can we do even better at managing our A/R process without increasing the burden on our staff and ourselves?
After reviewing the list of improvements we needed to manage, we chose to use available and proven technology to help us solve the issue. We implemented a transportation management software (TMS) solution to address A/R improvements along with several other business issues. The software provides the following features to support our A/R management:
Faster Billing At A Lower Cost - In order to speed up our billing process, we needed the ability to get the invoices out the door to the customer as soon as the work is complete without sending our postage cost through the roof. The TMS system allows the dispatchers to enter orders and track them. When the shipment is complete all the order data is already in the system and immediately ready for invoicing. The software allows us to email or fax the invoice directly to the customer avoiding postage costs and mail time.
Improved Invoice Accuracy - Well-designed data management software allows personnel to enter data one time; making it available from original entry through the entire process without having to be reentered or copied. Our new TMS system reduced redundant data entry dramatically, which in turn, reduced the opportunity for errors. The system also allows for easy review of orders and shipment details before we send invoices to our customers. Our invoice accuracy has improved and as a result, we have removed one of the primary customer excuses for late payment.
Ability To Manage Invoice Terms On An Individual Customer Basis - With the database software, we now have all of the customer information in the same database as the order and invoice information. Because it is all together, we can set the customers individual invoice terms within the customer record. When we send an invoice to the customer, the invoice automatically reflects the customers' terms. If a customer is not in good standing, it is simple to make changes in the system. We can increase their rates, change their terms, or block any further orders from being dispatched. We can also easily communicate to our dispatchers if a customer is required to pay the shipping upon delivery of the freight.
Access To A/R Aging And Customer Contact Information Instantly - Since frequent review of the A/R aging is critical we needed a way to quickly assess the health of our A/R, identify problems, and contact customers immediately to address issues. The TMS system gives us all of the tools we need. We can run an A/R status identifying which accounts we need to address and the customer contact information is at our fingertips so we can immediately make contact with the customer. It also gives us a place to track notes each time we talk to a customer about an overdue account and set reminders notices to contact the customer for follow-up.
Ability to Automatically Remind Customers of Account Status - The TMS software automatically emails our overdue customers and reminds them of their account status on a weekly basis. We avoid the administrative cost of generating account statement and the postage cost to mail them. Because the customer is consistently reminded of an overdue balance, we increase our chances of getting paid.
Ability To Respond Quickly To Customer Billing Questions And Fix Mistakes Rapidly - The TMS software allows us to have all the data we need to answer questions about PODs, dates of pick and delivery, shipment details, even information about freight damage all at our fingertips while we talking with a customer. We can quickly resolve issues and fax or email updated invoices instantly.
Ability To Send Required Information To Collections Easily - Previously, when an account reached the point we need to send it to collections, the tasks was overwhelming. We had to pull data from multiple places, copy PODs, and compile all of the information to mail to the collections company. Now with the TMS system, all of the data is stored in one location. Compiling account history, invoices, and POD's is no longer and issue. We easily transmit them via fax or email to our collections agency.
When we first learned of our A/R failures, we also learned a large number of small companies do not realize the dramatic impact aging A/R can have on available cash. We definitely didn't until it became clear we were making money, but we didn't have any. By educating ourselves on good A/R management practices and implementing a transportation management software system to support best practices, we were able to easily manage our A/R without adding a heavy management burden. The impact has been dramatic. With consistent management of our A/R aging, our cash flow has stabilized, we are in good standing with our vendors, and best of all our stress level is once again manageable.
Rosanne Wiesen NW Shippers, Inc.
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