Managing Accounts Receivable to Improve Cash Flow in Transportation

Veterans of the transportation industry know just how challenging it can be to generate strong profit margins. Despite the relatively high volume of the sector, the costs associated with shipping goods can be unpredictable, and the industry is often highly sensitive to changes in the global and national economy. Notably, revenue in transportation and warehousing decreased by 8.5% in 2020, likely due to the impacts of COVID-19.

Meanwhile, low barriers to entry drive fierce competition in the industry, and the push to compete on price can bring margins down even further. Given these dynamics, transportation companies must find other areas where they can push cost efficiencies. One key tactic is to develop systems for managing accounts receivable that help to boost the bottom line.

Cash management complexities

One of the biggest issues that transportation companies face is slow payment by large corporate customers. Although the terms may say 30 days, some large companies pay closer to 60 days. One reason for this is internal policy, but another is damaged freight claims. Any claim against a shipment will delay collection as the specifics are sorted out and addressed.

Another factor driving complexity is that payment generally requires that certain items—proper form completion, for example—have already been accounted for. Any hiccups can delay invoicing. Also, many companies use owner-operated fleets. In these cases, the owner-operators expect payment weekly, as they have their own bills to cover. This results in a mismatch between cash inflow and outflow.

Procedures for improved cash flow

In low-margin businesses such as transportation, strict cash flow management controls can mean the difference between long-term viability and near-term disaster. Fortunately, your accounting department can craft and fully implement written policies to avoid these issues.

First, create and follow a credit policy. Instruct prospective customers to complete a credit application and verify three references that offer the same terms the customer requested. Those who don't pass the credit check or who require extra collection efforts later must provide a deposit or pay when they request service.

Second, revamp your operations to immediately process orders, including confirming delivery, and submit them to billing. An account receivable isn't generated until you send an actual invoice. This can greatly lengthen your cash collection time.

Next, create or revamp your collection process incorporating strict payment terms and guidelines, then follow it rigorously. A smooth process includes both an initial confirmation of service delivery and bill receipt and a friendly payment reminder before payment is due for all customers who haven't yet paid.

To speed up payment receipt, consider offering a small discount to creditworthy customers for immediate payment. Offer clients the option to pay via credit card and link the invoice to the payment portal for ease of use. Work with your bank to provide secure online payment options, such as EFT and e-checks, for convenience and speed.

Getting customers on board

Once you've created or updated your policies, send a letter briefly explaining these changes to your customers. To convey the importance, have your Controller or CFO sign the letter, although your bookkeeper can send it.

In the letter, maintain a tone that's informative, respectful and honest, but also firm. Here are a couple of example opening sentences:

• "We've had some issues in the past with credit and collections, so we've revamped our policies. For those of you who have always paid on time, we sincerely thank you. For those who haven't, our new system will help support adherence."
• "In our efforts for continuous improvement, we've revamped our credit, billing and collections processes and systems."

To ensure customers receive their full invoices without any issues, include a follow-up call within two to three days as part of your collections process. Unlike true collection calls, this check-in is easy and comfortable for any accounting staff. Even more important, doing so enables you to head off or rectify any issues that would have delayed payment.

Remember to thank your promptly paying customers for their business. Offer them the best terms, notify them of potential discounts and respond quickly to any complaints. In this way, you strengthen your customer relationships and build a stronger business.

All these actions are effective ways to manage your cash flow. Managing accounts receivable is the foundation of a strong cash flow management system. Lastly, remember to speak with your banker about a new or increased credit line to smooth the unavoidable gaps between cash inflows and outflows.