It’s the heartbeat of your operation.

By Timothy Brady

Cash flow is the lifeblood of your trucking operation. You can have the very best paying customers in the business; you can consistently have the highest paying loads. But unless you receive payment in a continuous and consistent manner; and more importantly, before your bills need to be paid, you’ll be out of business. The next two posts will cover seven important components to managing your small carrier’s cash flow.

One: Your accounts receivable and your Days Sales Outstanding (DSO) figure:

For small motor carriers, cash flow management is avoiding long periods of cash shortages, caused by having too great a gap between when accounts receivable are paid and when your bills are due. If you run out of cash before you run out of month, you’re in trouble; do it month after month and you’re out of business.

Whenever you allow a shipper to pay on credit, you become a lender. If done with limits and controls, issuing credit can be an effective revenue enhancer. Done haphazardly, it can lead to a cash flow nightmare. Constantly look at your Days Sales Outstanding (DSO). This is how many days from when a shipment was dispatched or delivered to when the hauling invoice is paid in full. If final payment on a delivered shipment exceeds 50 days from dispatch or 40 days from delivery, you have a problem; and the more accounts which fit this description, the bigger the crisis. The bottom line is, if you’re going to issue credit, make sure your customer pays in a timely manner.

Two: Knowing when and when not to issue credit to a customer:

Give credit only where credit is due. Running the standard credit check and checking a company’s Dunn & Bradstreet score is a great start to establishing credit, but it’s only a start. Usually by the time either a credit reporting agency or D&B have negative credit information it’s already too late, as typically this information is months old. Have customers list their local credit references and banks. If a company fails, the small businesses who have issued credit to it are at the end of the collection list. So you must know the risk your customers represent to your revenue-producing capacity. What’s their credit rating? How’s their paying history? What are their projections for growth? What are their weaknesses? Are there problems on the horizon for this company or their industry? Labor troubles looming, foreign competition, recalls, product or patent lawsuits? Is there anything that could interrupt your customer providing you with loads? And remember, this is not a one-time process. You should track your customers’ credit worthiness minimally every six months.

Three: Manage your credit—know your credit score—and don’t abuse it:

Your ability to borrow cash from time to time can get you through rough economic times and periods of growth. Abused credit is one of the greatest destroyers of small businesses, right behind not having a business plan. Create a strategic credit plan which outlines when, why and how you are going to borrow money. Never borrow more than you need. Have a definitive payback plan. Always make more money than what it’s going to cost you to borrow it.

Next week we’ll cover numbers Four through Seven to complete the Seven Important Components to Managing Your Small Carrier’s Cash Flow.

Good loads and good roads, everyone.

Timothy Brady  © 2010

http://www.timothybrady.com