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Receivables Cash Flow

Today’s wholesale marketers still continue to struggle with receivables timing and terms. With regard to balance sheet dollars, receivables are usually the highest dollar item on a marketer’s balance sheet. Couple that with the fact that every $100,000 in accounts receivable costs a company a minimum $10,000 a year in foregone profits, good receivables management is paramount to end-of-year profits.

Today’s good management practices are as follows:

Dealer Terms – very few marketers still give 7 or 10-day terms to volume dealers. Instead, payments are always load-to-load.    New dealers should always be put on COD unless you can secure adequate collateral. The dealer should have his station financing include his start-up inventory. Since the first load is financed, he will have the cash from the first delivery to pay the second delivery and so forth.

Commercial Fuel Terms – The most common fuel terms are 7 days, collected by EFT.   Some marketers offer 10 and 15-day terms, but Meridian is seeing those decreasing. In rural farming areas, 30-day terms are still offered, but many marketers are working with rural agriculture accounts on shorter terms as well.

Commercial Lube Terms – We still see the majority of lube customers on 30-day terms, although some savvy marketers have reduced terms to 15 days on their larger accounts.

Cardlock Terms – Most large volume cardlock owners would like to move to 15-day terms, although the market is still dictating 30-day terms and most cardlock pricing can easily support the longer term.

Pricing Based on Payment Terms – A general rule of thumb when pricing accounts is that every 15 days terms extended to your customer costs your petroleum company about ½ cent per gallon. This halfpenny cost is calculated using today’s common bank interest rates. Therefore, a customer on 30-day terms should be priced at least one penny higher than a COD customer.   Anyone who quotes fuel pricing at your company should be made aware of the holding cost and price accordingly.

EFT – Most marketers are requiring all new commercial accounts, including fuel, lubes and propane, to pay by EFT terms. In addition, most marketers are converting old customers as quickly as possible to EFT. Most large marketers are striving for 100% EFT payments.

Residential Budget Billing – For the heating fuel and propane residential sector, budget billings are the best cash flow creators. By investing early payments at above-market rates such as offered in credit card pools, cash flow and profits are enhanced.

Initial Credit Limits – Many marketers that have attended Meridian’s Focus on Credit seminars in the past have developed concrete credit limit guidelines and assigned individual credit limits by customer. Documentation requirements for large accounts (individually defined by marketer companies – usually $10,000 to $50,000) include financial statements as well as credit application.

New Account Set-up – Getting correct billing requirements and procedures from new account customers is paramount for quick collections.

Credit Monitoring – Bad debt write-offs are a direct reflection of credit monitoring procedures. Most companies now require annual credit limit reviews with quarterly reviews on extremely large accounts.

Automated Credit Limit Checks and Load Holds – Today’s best billing systems allow credit managers to set individual credit limits and automatically stop any transactions when the customer is over their credit limit before the load is delivered. Systems that only detect over limit situations after a load is delivered are far inferior.

Same-Day Payment Posting – For an automated credit check and hold system to work properly, payment credit must be posted immediately. The Savviest marketers have linked their EFT draft system to their postings with an override only in the event of insufficient funds in the customer’s EFT account.

Accurate Invoices – Timely payment receipt depends upon accurate invoicing. Track the number of credit and rebills your company is forced to do weekly to test the efficiency of your present invoice system. Customers will not promptly pay bills they don’t trust!

Sales Commissions on Collected Dollars – Many marketers have converted their sales compensation to pay when the customer pays to have salespeople more proactive with customer payment timeliness.

Finally, many marketers want to know what is “normal” for receivables collection time. When looking at day’s sales outstanding (DSO), the normal benchmark average is 1.2 times average terms. So…if you offer 15-day terms, your company would be average with 18 DSO; if you offer 30-day terms, 36 DSO would be average. If you compute your DSO and find something much greater than 1.2 times your average terms, get to work! It’s your cash, your cash flow and your profits!

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