Technology often helps concrete producers enact small changes that make a big impact. This Tech Talk column examines real-life ROI (return on investment) for reducing the expense of financing your customers’ operations. The data is from real producers using technology to improve performance. To protect financial information, fictional company financials are used.
Donating to your customers
The CFO of WW Ready Mix is concerned about being a bank that sells concrete. Producers are enjoying one of the best markets in memory, but even so, on any given day WW endures the carry cost on over $45.1 million of unpaid invoices. This is real money with real costs. Using a 6.25% rate for funds, $0.56/CY is “donated” to offset the customers’ operational costs.
It will get worse. As we move back toward a more normal market, or even slip into the bad-old-days of a few years ago, payments will be much slower, nuisance disputes will increase, and most importantly some customers will go bankrupt and never pay. Just like the Beatles warned: “You never give me your money / You only give me your funny paper / And in the middle of negotiations / You break down.”
WW wants to do better today and protect against the downturn tomorrow. At the same time, they realize producers must do what it takes to stay in business. As a result, the CFO identified each factor that required cash to supplement customer operations, considered what could be done to mitigate the risk, prioritized and started to change the business process.
For a few dollars more
The CFO deployed a mobile app for customers that included information about projects, orders, tickets, invoices, statements, and outstanding balances. WW had already gone to daily invoicing, but the app, combined with daily deliveries, allowed the customer to always know exactly what was owed. Customers still need the desire and the ability to pay, but in the current good market, most of the battle was to communicate accurate, real-time information.
As a result, WW reduced the invoice balance from $45.1M to $40.1M by improving from 99.0% of invoices paid on average in 35 days to 99.5% paid in 31 days. These small changes produced a one-time improvement for operating capital of $5 million, anticipating a 12.5% internal rate of return for reinvestment, or $619,000. There was also an immediate reduction of $309,500 for interest carry charges, calculated at prime +1.5%.
The scary scenario remained: Returning to the days of slow-to-no pay. The CFO implemented the process of using automated customer scorecards within the company’s sales management system. WW also modernized its dispatch and truck tracking system with the ability to file liens compliant for each state of operation using the exact information for product, quantities, expense, location, and timing for begin and end pouring. While no-pay is not currently an issue, WW is now armed with technology that can automatically identify at-risk customers and initiate the lien process.
Economic impact
WW now can identify individual customers as they become at-risk and mitigate the financial exposure: Being prepared for the eventual downturn is essential to sustain the business for future generations. The anticipated return of 12.5% on the increased working capital of $5 million has too many independent variables to be considered for financial planning. Thus, the immediate economic impact is from reduced interest carry charges, amounting to $309,500 for 2018, which represents 0.6% EBITDA growth.
