Five ways Recycling companies can get more cash in the bank
Ever wondered how to get more cash into your bank account?
It’s a question we ask ourselves on a regular basis. I recently observed a profitable company go out of business because they were not able to service their debt, which was saddening. Even if our business is not in dire straits, the need for sound cash management is still paramount. Good cash management gives us the ability to invest – and if ever there was a time to invest in the environmental sector, this is it.
Method One: Redefine your Debtor Days
I have worked with businesses from a wide range of industries over the years and I often find myself comparing and contrasting recycling & waste companies with those outside of the sector. It has become more and more apparent to me that during periods of growth some organisations can survive or even flourish despite their poor cash-flow management.
A meeting with the owner of one such company highlighted a major concern to me; with a turnover of around £12 million, the company in question completed waste collections and invoiced their customers for the service provided. They gave their customers 30 day payment terms but the average collection period was around 60 days. They had cash in the bank so did not see cash collection as a major concern. However, what staggered me the most was the answer to the next question I posed; “From completing the waste collection, what was the average length of time taken before the invoice was raised?”, “6 weeks” came the response. Yes, 6 weeks, that’s 42 days: add that to the 60 debtor days and the customer was paying for a service over 100 days after it was delivered!
Having composed myself, I enquired further to try and understand why they provide a service but not invoice the customer for 6 weeks. The reason was that the invoicing process was individual to almost every customer, each wanting different information on the invoice documents along with copies of waste transfer notes, driver dockets, job sheets etc. Some wanted an invoice per lift, others wanted an invoice per month. I explained to this customer that if they could produce the invoices on the day the job was completed, or in some cases on the very last day of the month, we could add significant cash into his bank. It is quite a simple calculation:
Extra cash = no. of days taken out of invoice process X (annual turnover/365)
Even if we only brought forward the invoicing by 5 days, this organisation would add £164,383 to their bank balance. This can only be achieved by having robust and efficient systems in place, and of course a good deal of perseverance. But the key really is to view debtor days as the time from delivering the service to banking the cash.
Method Two: Check your terms
If your suppliers give you 30 days and you pay on time then that is good ethical business. But if at the same time you give your customers 30 days but they pay on 45, then that is risky business. It is common to see negative cash-flow created from by a mismatch between Customer credit terms and Vendor credit terms. Time to renegotiate?
Method Three: Check your weight
We covered above the issue and impact of invoicing late – it impacts the real debtor days figure. We live in an industry where the weight of material collected is commonly a multiplier used to generate the invoice value. If we move the material ourselves, or it comes over our own weighbridge, then that is an easy figure to capture. However, much work in this industry is completed by third parties. In fact, many, if not most, companies in this sector will regularly contract work out but also act as a sub-contractor for other companies themselves.
How often is invoicing your customer delayed as you are waiting for a weight from the contractor who completed the work on your behalf? This is an extremely common reason for delayed invoicing.
Consider this as a scenario; if you say to your contractors our new terms are to pay on 60 days, but if you enter the weight of material into our Contractor web portal on the day you do the movement we will pay you on 14 days, how many will make that effort – I bet it would be the majority. Managed correctly, this can be good for you and your contractor.
Method Four: Finance
Most companies have access to finance, especially on hard assets such as vehicles. This can be an easy and cost-effective way to get cash moving. As long as you can use that cash to generate a greater return than the interest rate charged then you should be in a good position. But be wary of going down the finance route if you are already in a difficult situation as the provider will want a disproportionate return for the perceived risk.
Method Five: Reduce cash tied up in stock
Since the time of Henry Ford producing the Model T businesses have understood Economic Order Quantity (EOQ). This is the principle of considering the cost of buying and holding stock, then reducing those costs to the minimum level required to be able meet your production/sales demand. Of course, in the recycling sector the same principles do not apply, or do they? Many dismiss this concept and argue that they have little control over the input feed – they get the material that comes through the gate regardless, and that they can only ship material out when they have a full load. I’m less convinced, it is time to look again, and there are some smart companies out there who apply supply-chain principles such as EOQ to the decisions they make each day. They look at the rate of stock turn and the cash tied up in that stock. If you have bales of black plastic bags sat around for months, it is unlikely to impact cash-flow as it is such low value (though it can curtail your operations if you are limited by space or tonnage restrictions). But if you are carrying significant amounts of copper just for a few days it can have a significant impact.
As an action, you might want to review your inventory, consider the cash tied up, and use this information when making those buy/sell decisions.
As this industry becomes more and more part of the traditional supply-chain we must increasingly apply those supply-chain principles, just like the virgin material suppliers have been doing since Henry Ford’s day. In most business decisions there should be a consideration of the cash impact – and this perhaps requires some education for those people in the business that make those decisions. Taking a lean approach, removing any lag or non-value add time can significantly impact bank balances. Consider the cash tied up in stock – how long has it been there and how soon can you release it? A cash-aware business with efficient supply-chain systems should flourish as moves from intensive care to ready to invest and fully fit for business.