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Beat the Fuel Price Increase Cash Crunch

Feeling the cash pinch from higher fuel prices? You’re not alone! Our phones at Meridian have been ringing off the hook with wholesale marketers caught in a recent cash squeeze. Unfortunately, this squeeze is due to the difference between receivables and payables timing. Most marketers must pay their suppliers long before they receive payment from their customers. In fact, this timing difference averages ten days industry-wide.

This delay time wouldn’t be so crucial if the recent price increase was a one-time situation. What’s happening lately, however, is that prices keep inching upward without any relief in sight. For a marketer selling five million gallons of fuel per month, a ten-cent upward shift in price translates to a $500,000 dip into cash! Ouch!

And it may even be worse. One marketer called us when he realized he needed a very fast $1,000,000 line increase to make it through the month! For this marketer, an extra $1,000,000 on his line of credit will also mean an extra $7,000 in interest expense this month and over $85,000 for the year if prices stay up. To avoid extra interest costs, take action now!

1) It’s imperative to stay on top of customer credit. Since every load of fuel is now more dollars out the door, marketers have larger bad debt exposure which means their credit department needs to be on top of credit worthiness and credit limits. (Remember we have our Focus on Credit seminar coming up in Dallas in May and San Diego in July to help you.)

2) Get receivables money owed in the door as quickly as possible. If you are a long-time MFA reader, you know that collecting by EFT is the absolute best thing you can do for your cash flow. (For help on EFT conversions, see MFA’s June 1997 issue – Converting Existing Customers to EFT.)

EFT forces your customers to terms. Because customers are forced to pay on time and can’t delay, most marketers find a three to four day collection timing advantage when they switch customers to EFT. For a five-million gallon marketer, changing to EFT would produce over $600,000 incoming cash. Notice that this incoming EFT cash would more than offset the $500,000 hit to cash from a ten-cent fuel price increase!
3) When rack prices are rising, it’s imperative to keep pace with customer and street pricing. If you lag by even one day, you can wreak havoc on your gross margins. Review your pricing system procedures to be sure all is running smoothly.

4) Maximize your evening driver shift during price escalations. The ability to preload your next day’s morning deliveries can give margins a great boost. Since you’ll have truck and trailers full of fuel sitting somewhere overnight, make sure security and safety procedures are adequate.

5) Watch out for too-low supplier credit limits. During price spikes when a marketer reaches his company’s credit limit, a refiner’s billing software may automatically draft for payment prior to the usual ten or twelve day due date to keep the total owing within the credit dollar limit approved. Often payables staff does not think to question the EFT or even bring the problem to management attention. When refiners draft early, a marketer’s cash flow is hit more severely because the timing difference between receivables and payables becomes even greater than ten days.

To avoid this problem, make accounting staff aware of refiner limits and terms. Ideally, lifting volume that brings the amount owing to even moderately close to a credit limit should trigger a request for a limit increase. At Meridian, we have suggested to many major refiners that credit limits be established in gallons rather than dollars, but so far our suggestion has fallen on deaf ears!
6) Once you have the receivables, pricing and payables under control, it’s time to manage inventory. This part gets a little tricky because you want your fuel tanks full when prices are rising, but you need to drastically reduce all your non-fuel inventory to produce cash. The best way to get a handle on non-fuel inventory is through your GL software inventory trend reports. If you are not familiar with that module of your system, call your vendor and get educated. Used effectively, those reports will save you a bundle! Most wholesale, especially those who deal in lubes, can easily produce $100,000 or more in cash without missing a beat.

7) Take a hard look at capital spending. During fuel price spikes, curb spending unless the investment produces immediate cash flow. Only invest in projects that will provide immediate bang for your buck, and then finance those projects so you’re not using precious cash needed to support operations for your long-term investments.

8) If you’ve been contemplating major technology or software changes, put them on hold until fuel prices show some inkling of stabilization. Those projects undoubtedly end up being extremely costly in man hours way beyond any time you may have estimated. While waiting, use the time for extra planning and research, like our Focus on Software seminar.

Finally, look forward to a time in the future when prices eventually drop, and your company becomes cash rich again. Keep reminding yourself of how nice it feels when that cash comes pouring in the door. That memory will make this time of escalating prices and subsequent cash flow squeezes just a bit more bearable. There is light at the end of the tunnel!

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