Zontrolling cash Ind credit
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onstant close supervision of finances as become an essential for all sizes of 'ansport business
K. J. Walker
Vlr Walker is managing director of Dallas (Kingston) Ltd, a TDG company which runs 40 vehicles on specialist lowloader work and 20 on contract hire. A qualified accountant, he entered transport at the headquarters of Transport Development Group Ltd, became transport director of J. Spurling Ltd and about five years ago moved to take charge of Dallas.
EW haulage companies can be facing the year 1975 with ther than apprehension. Traffic is at a premium and the idications are that this position will obtain for some little hile to come. Costs continue to increase at an alarming Ile. eating into margins that are already keen. The haulage idustry has never been renowned for producing an iequate return on capital employed and in this era of ifiation even achieving a profit, adequate or not, is no uarantee of =mining in business.
Never before has there been such a strain on liquidity in idustry in general and the haulage industry is no exception. he additional working capital required to finance fuel, pares, tyres and, of course, wages, is very substantial and ssuming that it can be obtained, it is very, very expensive. If we assume a business is operating five 32-ton-gross rticulated vehicles and its customers take two months to ettle their accounts, then on a conservative basis the dditional cash required by the business to operate as it did List 12 months ago amounts to E1,000, as illustrated below.
It is absolutely imperative that the same detailed supervision that is devoted to the physical operation of the :ompany is devoted to the finances of the company. As :raffle demand fluctuates from day to day, week to week, so Joes the cash requirement. It is essential that information is readily and regularly available for the proper planning and control of cash resources. The following example indicates the broad pattern over a six-month period having regard to known facts, planned vehicle replacements and budgeted profit based on a certain return on capital employed. The above information can be broken down into months and the exercise should he repeated every other month covering the next six-monthly period. It will be possible to observe the fluctuations and timely decisions made and appropriate action taken in the light of them, for example, short-term borrowing required to meet Corporation .Tax liability, or, temporary surplus cash to be deposited at hest possible interest rate and redeemable on demand. '
The foregoing gives the overall projected cash position but for the day to day'control a more detailed monthly payments and receipts analysis is appropriate as below.
The above exercise should be completed every month and iill be based on past experience updated for known ariations. The information produced will highlight the ,eaks and troughs and forewarned is forearmed.
The days of taking extended credit from suppliers are over nd indeed the fuel companies and most garages allow at ,est one month's credit only. This has further strained the aulier's resources, and in turn his customers must be isciplined into paying promptly. The importance of strict redit control cannot be over-emphasized. A job carried out )r £100 and calculated to show a profit of £15 is very nice ut if you have to wait six months for payment your alculated profit is effectively halved.
There are many credit control systems but all adopt the ime basic principles as below.
New customers must provide trade/ bank references or a atus report taken out via Dun & Bradstreet or similar rganisat4on. Any work undertaken before obtaining itisfactory references should be on a cash basis.
Invoices must be rendered promptly and accurately, as ust monthly statements.
Terms of credit must be made clear.
A list of outstanding accounts must be drawn up at the id of each month broken down into the months itstanding, e.g.
Immediately an account exceeds the normal terms of !dit action must be taken. This may take the form of a litely worded letter drawing the customer's attention to his parent oversight or a telephone call either to the accounts Iartment or the usual transport contact. If the account is 1 outstanding after 7-10 days a follow up letter in firm les should be sent. If this fails to stir the customer within 10 days then a third letter insisting on settlement by a !cific date failing which legal action will be taken is 3ropriate. Whenever any action is taken regarding an !ount it should be recorded in the "Remarks" column so t the up to date position on all accounts is immediately iilable and understandable to anyone in the company.
e treatment afforded overdue accounts must be ermined by the management rather than the accounting ction and will obviously vary with the nature and )ortance of the customer. However, to be effective a tern of credit control must be consistent and persistent. Where legal action is threatened it should be )Iemented and no further credit granted to that customer. It is prudent to take out status reports from time to time larger customers who are continually exceeding the of credit.
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f by now you have not decided to look around for an ier way to earn a living then you will be giving sideration to replacing one or two of your older vehicles. it 1968 tractive unit plated at 24 tons GTW which cost )00 including fifth-wheel, painting, etc for instance. The ie vehicle will now cost £6,000.
'here are several methods of funding your new vehicle: I) Outright purchase )) Hire purchase ;) Leasing I) Contract hire he advantages and disadvantages of each of these methods have filled many pages in many journals. OnIy.thi user can determine which method should he adopted anc due regard must be paid to available finance, the cost oi same, maintenance facilities, existing and future commit• ments, etc. One thing is quite certain and that is that, having provided for depreciation on the existing fleet calculated on the origititost of the fleet, the amount retained will fall far short of the cost of the replacement.
While ithis desirable that you operate a balanced fleet and it is accepted that delaying the replacement of vehicles can undermine vehicle reliability and build up problems at a later stage, there may be some merit in considering the complete overhaul of some or all of those vehicles scheduled for replacement. This would really only be practicable in the case of a premium truck with a still sound, strong chassis.
The cost of replacing an existing 24-ton tractive unit can be calculated as under, assuming the new vehicle costs £6,900 to purchase outright.
Depreciation at 20 per cent per annum to residual value £100 • 1360 Interest on capital at 15 per cent 1035 £2395 As the vehicle to be replaced has already been fully depreciated and there is no capital outlay it could be argued that up to £2395 was available to overhaul the said vehicle and afford it a further two to three years' economic life. While this is somewhat of an over simplification it is worthy of detailed consideration as a means of conserving capital at this time.
The fleet will have to be replaced in due course and while it is impossible to forecast the rate of inflation a vehicle which costs £6900 today could cost as much as £8300 by the end of this year and as much as £10,000 by the end of 1976. Adequate provision for the replacement of existing vehicles at future prices would be made now.
Suffice to state that without proper financial controls no haulage business can possibly hope to remain in business for very much longer.