Steve Carpenter oversees business operations, sales, P&L, product and data. With an impressive 16-year tenure at Creditsafe, Steve has played an integral role in the company's international expansion efforts, spearheading global data acquisition and fostering global partnerships.
The logistics industry has been hit with several big challenges over the past few years - supply chain turmoil, a labor crisis, recession and soaring interest rates, to name a few.
All of it has impacted cash flow and had a knock-on effect on Accounts Receivables (AR) processes and performance.
Given all the moving parts that happen with needing to get products out the door so they can reach their final destination, strong AR processes are key to logistics businesses. It should be a priority for CFOs and their teams. Late receivables and payments lead to delayed shipments, eat into fuel budgets and put a strain on staff. And then you’re hit with a cash flow problem and that’s the fastest way to sink when you’re already treading water.
In this article, we’ll show you the Accounts Receivables KPIs that make a difference to your business, mistakes to avoid and how to set actionable goals.
Check your customers' business credit reports
Chapter 1
What does Accounts Receivables look like in logistics?
Traditionally, AR follows a similar path in the logistics industry as it does in a lot of other sectors because it still comes down to collecting money based on the purchase of goods via credit. Outstanding invoices signify a claim of payment and are expected to be received in a time frame of between 30 - 90 days, though this number can be affected based on transportation lead times.
Still, a typical process may run like this:
- Create accurate invoices and order confirmation: The preparation and issuing of invoices after providing goods and services. The invoice will include payment terms, due dates and relevant late fees and be provided in an ERP system.
- Invoices are sent to customers: Invoices are distributed to customers through email or third-party freight payment platforms.
- Monitor outstanding invoices: Keeping track of customer accounts, payment deadlines and status. Any discrepancies are brought up and addressed. This data is normally placed in a CRM system.
- Receive and record payment: Invoices are logged in an accounting system and payments are allocated to the correct customer account.
- Reconcile accounts receivable: Frequently reconciling AR records with bank statements and financial reports so accuracy is maintained. Business intelligence and AR analytics software are used.
- Chase late and non-payments: Following up with overdue clients and stepping up collections with legal action if needed.
- Review credit policies: Regularly reviewing credit and payment terms and adjusting collection strategies. This is done to optimize cash flow and lower bad debts.
- Compliance and regulation: Continually monitor different regulations and make sure compliance is met. This is handled with compliance management software and audit tools.
In an ideal world, this process would always run like clockwork. But finance departments oftentimes are underfunded, not prioritized or don’t have access to the necessary tools to make their jobs more effective. It creates lots of issues down the road with the ultimate destination being bankruptcy, as Montana-based Meadow Lark found out in 2023.
The freight company was forced to file for bankruptcy liquidation after listing assets of nearly $15.4 million in receivables and other circumstances “which included banking and funding issues, higher costs with lower rates, and last-minute insurance issues.” It’s also reported the business owed its employees $80,000 in back payments, suggesting it wasn’t receiving money fast enough and kept delaying payments until it was forced into multiple lawsuits as well.
Meadow Lark is a cautionary tale and indicative of what happens when logistics companies fail to get their cash flow management right.
Chapter 1
Common mistakes to avoid
- Not establishing terms upfront: Not being clear on payment terms with customers will lead to delays and confusion. Get payment terms in writing from the day you start doing business and include late fees so you’re covered in terms of delays.
- Not sending prompt invoices: Waiting too long to send invoices means customers have more time to delay. Send invoices as soon as the goods have been delivered.
- Not following up: Letting outstanding invoices build up will further eat into your cash flow. Send reminders frequently and remind customers of late fees.
- Not verifying customer credit risk: If you don’t check a customer’s business credit report before extending credit, you expose yourself to losing money down the line if they default on payments. Use a business credit report to check all the important financial data that will help you make an informed decision, such as how many past due payments they have, how long it takes to pay bills past payment terms (DBT), the total number and associated costs of legal filings and more. Not taking this step could cost your business dearly.
- Not automating AR processes: Manually sending invoices and following up with customers is time-consuming, frustrating and usually ineffective. Investing in the right financial automation software, such as ledger management software that integrates your own portfolio sales data with credit risk data, will help you prioritize collections so your cash flow doesn’t run empty.
- Not setting AR management KPIs: The success of your AR function rests heavily on how you monitor, measure and improve processes. This requires setting clear KPIs that your team is held accountable to in terms of AR success. Failing to do this could increase your bad debt and lower your company’s profitability.
Chapter 1
What are some important key performance indicators for AR?
Days Sales Outstanding (DSO)
DSO tracking is vital for invoice processing efficiency. It refers to the average number of days it takes a business to collect payments for sales. Measuring DSO is vital for protecting and improving cash flow.
To calculate DSO, divide the total Accounts Receivables for a given period by the total credit sales for the same period. Then multiply the result by the number of days in the period. The higher the DSO number is, the higher the risk is that cash flow will be tight. So, the ultimate goal should be to reduce the DSO number.
DSO Calculation Formula:
Days Sales Outstanding (DSO) = (Accounts Receivables/Net Credit Sales) x Number of Days
According to Nick Foley, Account Manager at Creditsafe, “DSO is a key performance indicator in credit management, offering valuable insights into cash flow, working capital efficiency, credit policy effectiveness, risk management and overall financial health. It helps credit managers make data-driven decisions that contribute to the financial stability and success of the business.”
Total number and dollar value of overdue invoices
These two metrics cover the total percentage of a logistics company’s invoices that are past due and the total dollar amount of those past due invoices. It’s useful for showing the rate of financial growth or decline. And you must remember that even the most established company’s financial health never runs in a straight line.
The ongoing logistics recession and supply chain disruptions have meant that brands with decades of heritage and prestige have been hit with cash flow issues. Yellow Corporation, a business with over 100 years of history, is the standout example here, having filed for bankruptcy in August 2023.
So, you need to pay close attention to the DSO metric as an indication of your cash flow health. Bill James, Enterprise Strategy Director at Creditsafe, has some words of advice for logistics companies.
“Don’t just look at the overall [invoice] percentage because it’s dollar weighted. If you have one large bill that was late and is in dispute, that could really skew the percentages. I always tell people to take a deeper dive into the full details of the trade payment data. The higher the DSO number, the worse it is. On a surface level, if DSO is 20% or higher, then look at the payment history of your customers and see if the high DSO is due to a large, single transaction that’s a big dollar amount. That could indicate that it’s an outlier. Analysis is always key.”
Open AR disputes
This is another essential AR metric for logistics companies. It refers to the number of invoice disputes that have resulted because of inaccurate information on invoices. This includes the wrong billing amount, billing address, contact information, etc.
Monitoring this metric is important, as repeated disputes drain time, energy and money and indicate a deeper problem with credit lending policies and payment options. The first step to resolution is finding the cause, coordinating the dispute ticket with the relevant teams and then handing it to the right person for customer communication.
For a deep dive into reconciling payments, you can read our blog on 10 steps to successful financial planning and analysis.
Billing timeliness
This is defined as the amount of time taken to send out billing invoices. If they aren’t sent out promptly or have errors, the likelihood of being paid late increases. There are a couple of different types of technology that will help you in measuring this metric:
- Optical character recognition technology: OCR software extracts invoice data like shipment details and speeds up the invoice processing timeline. Staff are still needed to monitor information to make sure of 100% accuracy.
- Fully automated verification: Algorithms will flag and verify duplicate invoices or incorrect prices and compare this information against pre-established benchmarks. This type of software is usually outsourced to a specialist and is usually more expensive than doing what’s needed in-house.
Timeliness of credit application
This refers to the timeliness and accuracy of the credit application process and an issue that many logistics need to overcome. Oftentimes, there isn’t a streamlined risk management method for seeing the kind of financial, legal and compliance risks that the company could be exposed to because of its suppliers and customers.
The solution lies in understanding which data points are clear indications of creditworthiness. For example, if a business credit report for a customer shows that the company’s Days Beyond Terms (DBT) spiked drastically in a short period of time (say, for example, increasing from 12 to 43 in a single month), this would be a red flag that something has slowed down the customer’s ability to pay invoices within the designated payment terms.
Similarly, you might see that the company’s revenue has declined for the last two years, while operating expenses have increased during that time. These data points would be another indicator of factors affecting its cash flow. So, any credit application data that’s flagged as negative will help you improve your AR process and reassess how you work with a specific customer.
Adherence to credit limits
Adherence to credit limits is the last of our credit risk assessment KPIs to pay attention to. If a customer is in danger of going over their approved credit limit, you should review their business credit report to check their financial health. This will help you decide whether to increase or reduce their credit limit so you can protect your business from long-term risks.
Don’t allow customers to go over the set credit limit simply because you have worked with them for years and don’t want to upset them. You need to protect your business first.
A company that potentially found itself in this situation is Big J Express, which filed for Chapter 7 bankruptcy in July 2023. The business had posted healthy growth in revenues over the past couple of years - $5.6 million in 2021 and $6.1 million in 2022. But in 2023, there was a significant drop in revenue to $1.5 million.
While revenue was on the decline for years, the company also owed its top creditors millions of dollars for equipment. For example, it owed Volvo Financial Services $2 million for seven 2022 and 2023 Volvo tractors and it owed Amur Equipment Finance $1.1 million for five 2022 Wabash National trailers. The company also took out more loans that weren’t “fully repaid or forgiven.”
The implication is that Big J Express tried to live beyond its credit limit for as long as possible without having any means of paying back what it owed. That is always a recipe for disaster.
About the Author
Steve Carpenter, Country Director, North America, Creditsafe