Volatility in the freight market seems to be never-ending, and the transportation industry has notably experienced quite a few difficulties since Covid-19. To ensure that the financial health is strong to withstand these current market swings, it is imperative that transportation companies have a strong cash flow. Below are simple processes closely tied to your management of customers that will lead to positive cash flows.

Do your homework first.

Customer payments are going to be the biggest driver of either positive or negative cash flow.

I have been there before; sales has a hot new lead on a customer with a ton of freight and “once we prove ourselves, we’ll be in and have a cash cow.”  Not so fast…make sure you do your homework.  

Customer credit checks are key, and a simple credit application process will ensure not only that you have all the relevant data to ensure you are comfortable with the financial wherewithal of the client, but that they also agree to your terms of sale. 

To cover all your bases, a credit application process should include reviewing a third-party credit source for data including: 

• Verification of the customer’s information (including location-specific information),
• Checking their credit scores, including:
  • Their days-to-pay and see how they are paying their other vendors, and 
  • Any pending bankruptcies or litigation that may impact their ability to operate and pay. 

Additional steps in the credit check process include:

• Speaking to credit references, and
• A simple Google search of the customer to see if there are any negative things out there about their promises to pay. 

Being a skeptic is key in this process because often a customer who cannot get credit elsewhere or has lost credit at an existing freight provider will go out looking for a new provider.

A credit application process also allows your company to clearly define the payment terms. 

The freight industry has traditionally had a variety of acceptable freight terms; in fact, most LTL and rail providers still have terms at N10 or N15. As part of the application process, define your customer pay terms as N15 and include delinquent payment charge penalties. Many clients will adhere to those policies, as it is not unusual in this industry, and it will give your company quicker cash flow. Not all clients will agree to these terms, but it is a good starting negotiation point, and try to avoid agreeing to customers paying you after you pay your drivers or carriers. The credit application is also a suitable place to confirm the point of contact for collections escalation, determine where to send dunning letters and statements, and what type of paperwork is needed in invoicing. 

Invoice quickly.

The quicker an invoice is issued to the customer, the quicker the cash will come in. A sense of urgency must be the driver in the employee(s) completing the freight invoicing. If the customer does not need proof of delivery, consider invoicing the day the load picks up to help speed up incoming cash. If the customer requires signed PODs, receipts, or other documents, then create a process that ensures that the customer is invoiced on the day the paperwork is received from the driver. 

Remember that the clock is ticking on payment to the driver as soon as you receive it; therefore it needs to be turned around immediately to coincide with incoming payment from customer.  If that paperwork is not audited and billed the same day as it is received, that has a negative impact on your cashflow. Depending on your volume, it may be wise to invest in a software system that will use OCR technology to identify discrepancies in audit and flag for review. There are a wide variety of software subscriptions available to help ensure quick turnaround of invoicing, and cash incoming faster. Outsourcing Freight Audit & Payment (FAP) to a payment service may also be something to consider if your company has a high volume. 

Once the first invoice goes out, a good tip is to confirm receipt of the first invoice to the customer’s A/P team to ensure that your company is set up in their system to be able to pay. It is good also to ask – Do they need a W-9? Do they have your correct pay-to address? One quick email or phone call can save cash flow days in the future.

Periodic review of your book.

With the market swinging up and down, it is key to also have a finger on the pulse of how well your existing clients are doing financially. Not only do new customers need to have credit checks as previously discussed, but existing customers need to be monitored, as well. One best practice is to review an existing customer’s credit data quarterly to determine if their credit line is still appropriate. The last thing you want is a customer whose creditability has tanked, but they have a large credit line available for shipping. 

Customer payments will be the biggest drivers of whether cash flow is positive or has a negative impact on the day-to-day operations of the business. These processes are proven to help increase your cash flow in a volatile freight market.

-Aimee Clardy, CFO

If you would like further information about Crown CFO & fractional CFO services, reach out to Mike DeMaio – [email protected]