The transportation industry is one of the most vital industries in the world, responsible for moving goods and people across great distances. However, like any industry, it has its fair share of challenges. Transportation businesses face a number of roadblocks in their pursuit to success, including the management of accounts receivables, bad debt, and overall cashflow bumps. In this article, we explore the challenges faced by the transportation industry and ways in which these can be diminished, presenting expert advice from senior executives who bring years of experience within the transportation sector.
The transportation industry is unique in that it typically operates on a credit basis. Often, this system of accounts receivable is necessary as it would be impractical to ask brokers to pay upfront for transportation services, especially for long-distance hauls that can take several days or even weeks to complete. This credit system comes with its own set of challenges.
One of the most significant challenges is the risk of bad debt. Bad debt occurs when a customer fails to pay their bill, either because they cannot afford to or because they refuse to. In return, businesses may turn to alternative funding sources to finance their operations, such as loans or a line of credit, which can cause an additional strain on their finances and credit score. Regular credit checks on all vendors and customers are also required to negate the risk of bad debt. As collection and legal actions can be expensive and time consuming, many transportation companies are left with no choice but to accept non-payments. In either case, bad debt can have a significant impact on a transportation company's cashflow, and if left unchecked, can lead to insolvency.
Cashflow gaps present a significant problem to transportation companies whose many expenses need to be fulfilled on time. As a credit operating industry, transportation businesses can often expect to wait thirty or more days for payment, as it is standard procedure to wait several weeks or months for the payment to be processed and the funds to be transferred. This delay can cause cashflow problems, particularly for small sole proprietors and owner operators that rely on timely payments to pay their own bills. Additionally, with a lack of cashflow, the businesses may suffer as investors and lenders will lose confidence in the businesses’ ability to generate revenue and make profit.
Proper and succinct accounts receivable management is required in order to achieve growing success across any industry. Missed and late payments can become a reoccurring trend without proper time and attention allocated to collections. Mishandled accounts and poor debtor relationships with brokers can amplify these late and missed payments further. Businesses may need to outsource this task when it becomes burdensome for the team, resulting in additional accrued costs for the business.
Transportation businesses face several constrictions while operating within this industry. These range from uncontrollable issues such as traffic congestion and inadequate highway infrastructure to high fuel prices and technological advancements. As interest rates continue to rise, many businesses have struggled to keep up with the soaring costs of operating within this economy. To navigate these financial challenges, several solutions can be implemented.
One way to mitigate the risk of bad debt and improve cashflow is to implement a cash on delivery (COD) system. This system is commonly used in the retail industry, where customers pay for goods or services at the time of delivery. Movements have since been made to apply this payment structure to the transportation industry with little success.
Implementing a COD system in the transportation industry would require a significant shift in how the industry operates. For transportation businesses, COD can be a crucial component of their operations for several reasons. COD provides an immediate source of revenue for transportation businesses as they would be required to make payments upfront, eliminating the risk of bad debt and thus improving cashflow. By receiving payment upfront, businesses can ensure that they have the necessary funds to cover their expenses and keep their operations running smoothly. This can be especially important for the transportation industry as unexpected expenses can arise and cashflow can be unpredictable.
COD can help transportation businesses build trust and credibility with their customers. By requiring customers to pay for services at the time of delivery, transportation businesses can demonstrate their reliability and professionalism. This can lead to repeat business and positive word-of-mouth referrals, which can be essential for growing a business.
COD may not be practical for transportation businesses that have a large volume of transactions or operate in multiple locations. Collecting payment in person for every transaction can be time-consuming and resource-intensive, particularly if the transportation business operates in different geographic locations. COD can also be risky for transportation businesses that operate in high-crime areas or that transport valuable goods. Requiring drivers to carry large amounts of cash can make them targets for theft or robbery, which can jeopardize their safety and the safety of the goods being transported.
While COD is becoming increasingly popular within this sector of business, it may not be suitable for some businesses that serve customers with established credit relationships or those who operate in industries with longer payment terms.
In such cases, transportation businesses may need to explore alternative payment methods such as invoice billing or online payment systems. While these methods may not provide the immediate cashflow benefits of COD, they can offer other advantages such as increased efficiency, improved customer convenience, and reduced risk of fraud or bad debt.
Invoice factoring is a financial service where a third-party company purchases a company's accounts receivable at a discounted rate, providing the company with cash up front.
Using invoice factoring can help transportation companies manage their cashflow by providing them with immediate access to funds that they would otherwise have to wait several weeks or months to receive. This can be particularly important for smaller transportation companies that rely on timely payments to pay their own bills and keep their operations running smoothly. It can also help avoid the risk of bad debt, as the third-party company assumes the responsibility of collecting from customers.
Invoice factoring also provides transportation businesses with additional benefits as they handle back-office tasks and provide free broker credit checks to ensure that their clients are working with trustworthy businesses. On top of its assistance with operational management, factoring helps to facilitate and maintain good customer relationships while the company works to communicate and build a reputable connection with brokers.
In addition, invoice factoring can provide transportation companies with greater flexibility in managing their cashflow. Depending on the terms of the agreement with the third-party company, transportation companies may be able to choose which accounts receivable they sell and when they sell them. This can allow transportation companies to manage their cashflow more effectively by avoiding problems during slow periods.
Overall, while the industry is still largely dominated by credit and COD remains non-viable for most, alternative funding sources such as invoice factoring, prove to be an effective way of closing the cashflow gap businesses continue to face. By understanding the unique challenges and limitations of their operations, transportation businesses can determine the best approach for managing their accounts receivables and cashflow while maintaining positive relationships with their customers.
While implementing a COD system in the transportation industry can provide several benefits, it may not be practical or feasible for all transportation businesses. Invoice factoring presents itself as an alternative solution that can help transportation companies manage their accounts receivables. By providing immediate payment for services and mitigating the risk of bad debt, invoice factoring can help transportation companies maintain positive relationships with their customers, improve their cashflow, and remain financially stable in a volatile and ever-changing environment.