Wednesday, June 29, 2011
The previous story took place when diesel was selling for about $0.775 a gallon. (Can you remember that far back?) Federal taxes were $0.243, and state taxes were $0.20 a gallon. Then there was a $0.012 loading fee, a 1% discount, and about a penny freight. That put the actual gross price of diesel at around $1.23453/gallon. Let's be optimistic and say he made $0.025/gallon (which included the freight). So he sold a customer a 7,000 load of diesel for around $8,782.
I was conservative in giving him the ten-day supplier float as a handicap. However, because of the method he chose for billing, he unintentionally allowed his customers the use of his money for fifty-four days. If he had invested that money in a good portfolio, it might have brought 15 percent interest. If you will buy the fact that his cost of handling the fuel was only a penny a gallon, his ancillary cost was $.022682/gallon.
Now wait a minute. If he made $.025 and lost $.023 cents, it's no wonder he was losing money. Okay, I'll concede he may have had the use of the state taxes for fifteen to thirty days; but, if he was hauling his own fuel, he had to pay the driver's salary, the payroll expense, the bookkeeper in the office, the postage, the insurance, the cost of sending out statements, and everything else he had to have in order to deliver and bill for fuel?
Let's make it simple. If his customers paid in ten days, maybe he made $175.00 on a 7,000 load. But if it took him fifty-four days to collect his money, he netted $16.23 on the same load - a net gain of only 2/10ths of 1 cent a gallon.
This guy had a good computer. If he had used it properly it could have saved him hundreds of thousands of dollars in lost profits. You cannot afford to not know how you stand at the end of every day. The continued use of inadequate information systems put the necessary tools out of the reach of typical oil jobbers and C-Store operators.
At one time it came to my attention that a small jobber had sustained a six figure loss within a single week. All of this attributed to one thief. The jobber had allowed a convenience store customer a $100,000 credit limit, but the customer had obtained a ‘virtual’ credit limit of $360,000 due to ‘float.’ In other words, in a deal gone sour, a perceived $100,000 exposure became a real $360,000 loss in a period of less than two weeks. A small jobber cannot afford a loss like this. To a large operator, it could be ten times worse.
What's the solution? If we don't give credit, somebody else will, and that somebody else will get the business, not us. But credit should be used as a convenience, not as a crutch.
Most of my customers have discontinued sending out statements entirely. They have adopted the practice of mailing invoices to their customers the day the transaction occurs. As of this writing, the postage to mail a statement is 44 cents. That's a lot cheaper than the losses incurred in a 54+ day receivables cycle.
Most of the bills I receive today are by invoice with instructions to pay in ten days, in fifteen days or within thirty days. Remember, "30 days by invoice" may be twenty-four days less than thirty days while using the traditional balance forward method of collecting your money on invoices. Customers are already accustomed to getting billed by invoice from other suppliers. Most likely you won't be the first to bill them this way.
Tuesday, June 28, 2011
I never really understood how dangerous float could be until I got a call from a frantic customer in 1986. I could tell by Carl's voice that he was beside himself. "Bill," he shouted over the phone. "Something's wrong with your computer system."
"What's the problem," I asked, trying to calm him down.
"Your computer just lost $100,000 out of my bank account," he insisted.
"What are you talking about?" I asked.
"I always carry $190,000 in my bank account," he continued, “and today, my account is down to $90,000. Where is it?" he demanded.
"Is the General Ledger out of balance?" I asked.
"No, I've checked all that," he said. "It's just gone."
"OK Carl," I replied. "If the ledger’s in balance, it has to be in there somewhere."
It became obvious I wasn't going to get any helpful information from Carl over the phone, so I jumped in my truck and drove the seventy-five miles to his business.
When I stepped into Carl's office, the office ladies gave me that look John Dillinger must have gotten just before the hanging. I found a comfortable desk and began to pour over his books. By four o'clock in the afternoon I had the answer.
To my surprise, I discovered Exxon, his supplier, had undergone a massive effort to analyze how long it takes them to receive their mail. They had found out when Carl mailed his checks to the Exxon collection center only 100 miles away, because of post office policies, it took seven days for Carl's checks to clear the bank, giving him a "virtual float" of seventeen days.
By Exxon moving Carl's payment center to a location over 750 miles away, surprisingly the checks cleared three days sooner. Carl simply lost three days of float on all of his fuel purchases in one fell swoop. As a result, $100,000 just vanished from Carl's bank account, just the same as if a thief had walked in and took it. Exxon got $100,000 richer in three days. Unfortunately, Carl couldn't withstand the loss and eventually lost his business.
When $20,000 shows up in the "over 90 day" column, everybody jumps to attention. But that's like saying, "The horse is loose again. Guess I forgot to close the gate." I am always amazed at the way oil marketers put on blinders when it comes to “Other People Using Their Money”. While using ‘balance forward receivables’, jobbers who sent out monthly statements were inadvertently giving their customers up to sixty days to pay their bills. Then they give them ten more days before they even thought about asking for their own money. It was no wonder, the average time it took for a jobber to collect his money was 54+ days.
Consider this: If you sent out statements totaling $500,000 at the end of the month, and only half of your customers immediately walked in and paid their bills the next day, you'd have $250,000 cash in your hands to spend, invest, pay bills or save for retirement. That would be like winning a "tax-free lottery ticket" wouldn't it? It would be a one-time gift that you would never have to pay back.
"What?" you say. “I'd have to use it to pay bills.” Maybe so, but what we've done is compress the time it takes you to collect your money by 50% and that means more working capital. For a typical oil jobber, that was about twenty-seven days. By the time you reach the end of this chapter, I'll show you how to decrease you collection period by as much as 81 percent. With $500,000 in receivables, that equates to an increase in working capital of over $400,000. $1,000,000 in receivables? How about $800,000 in additional working capital? Is it worth making a few changes in the way you operate your business to get your hands on that kind of extra cash? You bet it is.
Monday, June 27, 2011
If you’re sending out monthly statements there is a good chance you can make minor changes in your operation that will create $100,000 or more in additional working capital within three months or less. That's what this chapter is all about. There's gold in them there receivables, my friend. All you've got to do is bend down and pick it up. But wait… Is that going to require change?
Times keep changing and we continue to resist it. It’s human nature. We will do everything possible to hold back the tide, only to get flooded time and time again. I believe one of the major reasons businesses fail, is the out and out terror imposed by change. Kmart’s aversion to change made Walmart what it is today, a heck of a lot faster than Walmart would have been able to accomplish the same miracle otherwise.
We’ve all heard the idiom, “If it ain’t broke… don’t fix it.” If it were just us, it would be easier to deal with; but the fact is, our aversion to change is supported by almost everyone around us. Why? Because, they don’t want to change either. Things may get bad, but at least we know the consequences. We didn’t get killed, no one tried to eat us, we still have our scalps. “Whew, thank goodness for that.”
No one wants to be a “pioneer.” Those are the guys with the arrows in their backs. So if we have to change, let’s be sure everybody else we know has already gone down that path before we sheepishly follow behind; because if we fail, there will be a million Monday morning quarterbacks who will make us out to be ‘fools’ and label us as ‘stupid’.
You’ve all heard, “They can kill me, but they can’t eat me.” It’s a great pep-talk before walking into an IRS tax audit. Believe it or not, for some reason, people find that saying assuring. But change changes everything, doesn’t it? “They may kill me, but if I dare to change, they may be able to eat me after all.”
Twenty-two years ago, a customer proved to me, using the computer system I sold him, a customer could buy an $8,000 load of diesel, never pay for it, and he would never be the wiser. That's when I made up my mind to do something about it.
If cash is the life's blood of a jobber's business, then the heart of a jobber's business is its accounts receivable. With so many complicated business tasks out of your control, accounts receivable is one area where you can truly take command. Yet, most jobbers ignore their accounts receivable completely until a real problem shows up. The fact is, if you let a customer get in the ninety-day column, there's a good chance you'll never collect that money. If he hits the 120 day column, most of the time you can save yourself a lot of misery by just forgetting about it.
Some jobbers are so happy to get sales in any form, they are hesitant to do anything that might drive their customers away. When in actuality, you may be the last creditor they've got that lets them get away with the shenanigans they have been successful at pulling on you. Think about it: How much do you really make on a four-cent margin after sixty days? Is it worth it?
Most jobbers calmly sat back as their suppliers and the Federal and state governments took away their float. All the while they were carrying Farmer Brown for ninety days on a load of diesel they hauled fifty-miles and sold for two, measly cents over the rack. If you keep offering customers unlimited credit till they get ready to pay you, what's the incentive for them to pay you on time?
Next, I’ll relate a true event that happened to me and one of my customers back in 1986.
Now you may be thinking, ‘How did they pay their fuel bills if they were never entered into the system?’ Here’s a clue: A week later the Feds were in the building auditing the jobber’s books. This resulted in the Feds taking over the business. Back then you paid your fuel taxes in arrears and the Feds pretty mush trusted you to report your liabilities promptly. I don’t remember how long it had been since he last remitted his taxes, and I never understood how he got away with it for so long. All I know for sure is shoddy bookkeeping can result in serious trouble.
Everyone feels the pressure, but the warhorse gets the brunt of it. They stay late, they take it home, they come in on Saturday's and Sunday's to catch up. They neglect their husbands, their children, their grandchildren and their parents. You’d be doing them a favor by getting them some help, but before you choose that route, make it clear why you are doing it. A few may get mad and quit. In some cases it’s the best option. I know these warhorses. They'll run until their hearts burst inside their chests, if that's what they think you expect of them.
I don’t remember a single incident where a key employee quit while I was doing an installation, but here’s another amusing story that still sets my hair on end:
I got a call from an elderly jobber I’d called on for several years who asked me to come by and talk about selling him a computer system. He had a duck camp way out in the woods. I met him at his office and we rode out to the camp together in his truck. Not long after we got there, he cooked a mess of catfish and his two sons joined us for dinner. It was a “Deliverance” kind of meeting if you get my drift.
As we sat down to eat it was apparent the two boys, who were serving as the bobtail drivers for the company, were dead set against getting a computer of any kind; but the old man insisted. He said he would retire pretty quick and he wanted to leave his dear sons with a system that would see them through the years to come. An argument ensued and they got up and went away mad. I was already beginning to look for a back door, but there I was, out in the middle of nowhere without a paddle. I have to confess, I stayed awake most of the night listening to the old man snore.
The next morning he drove me back to the office and started introducing me to his other employees. There was an elderly woman doing the books and I had her sized up from the get go. I was certain she wouldn’t have anything to do with computers, as I had long been educated in this kind of situation.
To my surprise, she welcomed me with open arms. She had been the warhorse there for thirty years, and she was very excited because, “Finally,” she exclaimed. “Now we are going to find out why there’s 5,000 gallons of diesel missing every month.”
My mind wandered back to the two sons… the Neanderthals that were driving the bobtails, and I immediately pictured my swollen body bumping along the rapids and sailing down the river behind the duck camp. I quickly announced proudly, it was my opinion a computer wasn’t needed in this environment, excused myself, and refused to answer any of the old boy’s phone calls.
Another scary incident occurred when a warhorse’s husband stopped by the office with a gun to shoot a co-worker of mine. But, that’s another story.