Financial management: Managing payments
Financial management: Managing payments
04/06/2012

Software can help track the bottom line

Payment for services is no longer a “money in, money out” transaction. With the integration of credit cards, computers and software, taking payment has become more about processing. Today’s software isn’t just for payment, but for creating a new system of handling multiple forms of payment, checking payment history and making better financial decisions.

“A well-designed rental management system will bill with accuracy and therefore there will be fewer billing disputes,” says Clark Haley, president, Automated Rental Management, San Antonio, Texas. “A rental system should be able to deliver invoices via fax or email, which means that a customer will have the invoices quicker and get them in to their system for payment quicker. Rental companies that do a lot of reoccurring business with their customers can accept electronic funds transfer (EFT) payments which precludes having to print a check, wait for the mail to arrive and then get it deposited. EFTs are posted directly to your account, much like a wire transfer. It is important that a credit card processing system be able to handle pre-authorizations as well as deposits and it should be able to apply deposits automatically when the contract is shipped or invoiced.”

Haley says speed and accuracy can improve cash flow, but they do not necessarily improve profitability. “Good rental management software can definitely improve profitability in a number of ways. Just a few examples are better forecasting of revenue/expenses, utilization tracking, parts inventory levels/tracking, delivery/pickup of equipment, job/event costing and management dashboards,” he says.

Diana Saunders, sales/marketing, Xgensoft, Newmarket, Ontario, Canada, agrees. “It’s really easy for rental businesses to get so involved with inventory management and customer service that they can lose track of the overall financial operations of their business, whether it is orders that have been delivered and not invoiced, invoices that have not been sent to customers or paid, invoices that have been partially paid but have balances owing, long-term rentals that stay out in the field that require monthly billing and payment, regular customers who have a number of open and unpaid or partially unpaid invoices,” she says.

“Any one of these issues can considerably impact the bottom line. The benefit of rental software is that a button click can give you reports and customer statements that provide you with all of this information with no double entry. In other words, rental software provides the tools to keep you up to date on what your bottom line is and the tools to stay on top of it. Rental software saves you time and it definitely saves you money,” Saunders says.

Software also helps rental stores let their customers pay the way they want, whether it is by cash, check or credit card. In fact, for many, that is the first requirement of accounts receivable software.

“The ability to electronically process payments through your software is much more efficient than having your salesperson process all the payments through a credit card swipe terminal. You will want to take multiple forms of payment so your payment application must accept and record various payment types,” says Larry Weeman, president, Party Track/Event Rental Systems, Sahuarita, Ariz. “Your payment system must be flexible to handle payments that may cover multiple invoices so the payment can be allocated to one or more invoices efficiently.”

Many say that emailing invoices through software is the most efficient way to bill customers and save money. “Getting your invoices into the hands of the customer plays a big role in how quickly you’ll be paid,” says Lauren Dorman, vice president of product development, RMI Corp., Avon, Conn.

“There is both a time and cost consideration when mailing invoices. Statistics show that the average cost of printing, stuffing, stamping and mailing invoices is about $1.47 per invoice. Now, add to that a day or two for the invoice to be delivered by the postal service and it could be two to three days before it’s recorded into their payables system. All business software supports the printing and mailing of invoices, but to reduce your costs and get paid faster, consider converting your customers to accepting their invoices via email. You’ll save $1.47 on each invoice and it will be delivered to your customer the same day it’s generated,” Dorman says.

Ray Bonestroo, president, Genisys Software, Minneapolis, agrees with emailing invoices directly. “This same process can be done at the end of the month for statements,” he says. “We allow you to select up to 10 employees within a company to receive automated emailed statements.”

While rental stores can save money on processing statements and invoices, many struggle with credit card processing. “Although allowing your customers to pay their accounts receivable balance via credit card can be costly, many stores are switching as much of their A/R business to credit card as soon as possible, as a way to improve their aging, increase cash and lower collection costs, especially for smaller accounts,” says Rob Ross, president, Alert Management Systems, Colorado Springs, Colo. “Your software system should help you set goals and measure your progress, so you can assess the financial results of this strategy. Again, there is no single right strategy.”

Ross says the real cost of payment processing charges are often difficult to assess. “One thing is certain: any savings or overcharges go right to the bottom line,” Ross says.

“The most important thing to do is to add up all your charges and divide into the total amount of all your transactions. This will tell you your ‘effective rate’ versus the rate you pay for ‘qualifying’ charges. Inevitably, the effective rate is more representative of your real cost — and much higher. We also recommend that you periodically get a second opinion from an expert or consult with a broker for multiple competing payment systems. There is no one right answer, in part because every store will experience a different mix of cards and types of transactions. There can be differences in even the most subtle ways: How are fees credited for refunds, for example,” Ross says.

“With respect to your software vendor, it is important to know if you are free to choose any processor or if you are restricted to a particular vendor. Common sense tells you that you want to have the most competitive environment possible for your business. It is also fair to know if there will be recurring support and upgrade charges,” Ross says.


Time to work on your business

With the lessons learned from the past three years, managing your working capital has proven itself more critical than ever. Cash is king and managing the elements of your cash flow is always your top priority. One of the key issues, of course, is the credit policies you have in place to allow and collect your accounts receivables.

When you let your customer walk out the door and “pay you later,” you have gone into the banking business. So, if you are now a lender, did you:

  • Do a credit check?
  • Call their references?
  • Call their bank?
  • Set a payment schedule?
  • Get any money upfront?

If you can’t answer these questions in a positive way, you could develop some serious cash flow situations.

With a recession that is hopefully leveling out, many of you have lower sales, profits and cash flow. You have had to work hard inside your business just to keep it alive and survive. At times you did not see much light at the end the day, week, month or year. So, now is the time to get back to spending some time working on your business and not just in your business.

You need to track and measure the elements of your cash flow — money in, money out. Where is your cash? It is tied up in your receivables and inventory. Take your credit sales for the last 12 months and divide it by 365 to see how much you have tied up per day. Just think if you could reduce your receivable turns by 10 days. Multiply the daily amount times 10 and see how much more cash you would have in the bank. With that cash, you can pay your payroll, monthly bills and take your discounts. When you don’t have enough cash, you usually have to borrow and pay interest, which reduces your profit. All this is happening while your customers have your money.

Increasing your sales, of course, also is critical to returning to your financial success, but we have learned that there are good sales and bad sales. We cannot sacrifice our cash flow for just the sake of increasing the top line of our income statement. Your customers have experienced the same issues and there should not be any issues in today’s market when the terms of payment are discussed right upfront when we are closing the sale. This is especially important for those of you in construction equipment rental and those in party and event that handle large events.

Even if you now have good credit policies in place, you can still have some slow payments. If this is happening, who is the person that follows up and makes “the call?” In order for the customer to take this serious, the owner or manager should have the responsibility for this task. Having someone who does not have the authority to back up what is said should not be put in this position and it sends the wrong message to the customer.

Communication and training in this area needs to be part of your store culture. Not just upfront training, but it needs to be part of your staff and sales meetings. Also, asking everyone for their input on how to improve the cash flow of your business keeps them focused on this critical component of being in business. You might even think about creating incentives is this area.

If you think of your rental store as a “financial investment company,” it can change how you come to work every day. Passions for your work is important, but how you manage your capital and return on investment is how your build value in your business. A company needs both increased profit and strong cash flow for a strong business model, but as we have learned we can have an occasional reduction in profits, but we can’t open the doors without cash.

We are in a new world in business and can no longer manage in many of the ways that worked in the past. Strong leadership, good communication, focused plans, financial information, appropriate measurements and making the changes needed as you learn are critical in going from survival to success. In order to do all of that, just remember cash is king.

Steve Abercrombie, an associate with Profit Soup, Tukwila, Wash., was a speaker at The Rental Show 2012. Profit Soup helps independent businesses increase profit and work through business ownership finance issues by creating goals and business plans.