Tuesday, June 28, 2011
Thirty Years of Jobbers – Chapter 3-2
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.