Wednesday, June 29, 2011
Thirty Years of Jobbers – Chapter 3-3
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.