A major business expense often overlooked is poor or sub-optimal cash flow. When it takes a long time to get back what you have already paid out, operating expenses increase and profit margin is lowered. By improving cash flow your company decreases its costs and increases it profits. This blog post will explain specifically how you can also generate new revenue and improve customer satisfaction as well – all at the same time!Guest blog post by Chris Walker - Vice President at Starkweather Roofing (Phoenix, Arizona)
B2B Service Company
A Personal Example of Poor Cash Flow
Upon rejoining the company in February 2013, we quickly identified that for a variety of reasons invoices for commercial roof maintenance and emergency roof leak repair services took on average 45 days to be created. In other words, we had already paid for wages and materials a month-and-a-half before we even generated a request for payment. As a result past due receivables, collections efforts, and write-off’s were higher than necessary. Although service accounts for only ~10% of total revenues, cash flow was still clearly an opportunity for improvement worth pursuing. Thus, one of my first continuous improvement efforts focused squarely on increasing cash flow in our service department. Once an invoice is created, it takes an additional two to five business days for the postal service to deliver it to the customer. Depending on how mail is distributed upon receipt, their review and approval processes, as well as agreed upon payment terms and other policies and procedures of the company receiving our invoice, it could take another month or more from that point until we receive payment… assuming there are no discrepancies.
Invoice disputes create poor customer relations and require valuable resource time from both our accounting and our service department staff to resolve. When we have to send significantly past due invoices to collections, this further decreases our profits as the collections agency charges a fee and in some cases negotiates a settlement amount to resolve the debt. In the end, at times we lose money on a transaction or are forced to write-off the invoice entirely.
On average we weren’t being reimbursed for our actual outgoing expenses on the services we provided for two to four (or more) months after we incurred them. Multiply this over hundreds of transactions per month and include collections and write-off’s, and you can see how cash flow could become an issue.
How We Fixed Our Cash Flow Problem
Through process mapping, data analysis, and interviews with our staff and customers, the root causes of our cash flow problem was identified to be a result of timing and communication. We found the longer it took for a customer to receive our bill and the less clear it was what the bill was for, the longer it took for us to get paid. Now that we knew what was causing the problem, we could go about identifying solutions to minimize it.
Using an approach known as value stream mapping, the key stakeholders and I documented the process step-by-step, beginning with completion of the repairs through receipt of final payment. We documented the pain points throughout the process and grouped them into categories, flagged where process variations existed, identified what data was available, and then began to brainstorm ideas for incremental improvement. In order to fix our cash flow problem we had to make timely, accurate, and pre-aligned invoicing of our roof repair service work orders a priority and resource the process accordingly.
One major problem was timing (taking 45 days to create a bill). By the time the customer received the bill they sometimes had forgotten they ever requested the service for that particular building to begin with, and needed additional time to reconcile their records with our invoice. Another contributing factor was the lack of an adequate explanation of our bill. Other than the address or building name of the roof we serviced, often our invoices were vague and some customers didn’t quite know what exactly they were being asked to pay for. The customers we interviewed agreed that if we could fix these two issues (timing and transparency), payments could be made much faster.
Our Improved Invoicing Process
We now dedicate a percentage of one person’s time to immediately reviewing all completed roof repair work orders for accuracy (ensuring we account for all time and materials actually incurred) and ensuring there is a thorough, easy-to-understand explanation of the work performed. During this review we also double-check to see if the roof may be under warranty, or if this may have been a repeat problem. The double-check process step eliminates a large number of disputes over repairs that likely should not have been billed in the first place (requiring credits later in the year). Our new policy is to finish this review within 2 business days of the completion of the repair work.
Starkweather Roofing’s service technicians take before and after pictures of repairs, but we had rarely shared them with customers previously (unless asked). Because our customers rarely if ever actually see the roofs of the buildings they own or manage, we now accompany the photos with the invoice not only to demonstrate that the work was done, but so they can also see what exactly it is that caused their problem(s), get an idea of their roof’s overall condition, and view the quality and craftsmanship they are paying for. We have an online customer portal for customers to report leaks, monitor progress, view work history, and download invoices, warranty information, and more anytime from anywhere they have an internet connection. Our new policy is to always make these pictures visible in that online portal, and to do so as soon as the work order review is complete.
The invoice itself is generated immediately after the work order is validated and the pictures have been made visible in the customer portal. This end-to-end batch processing approach to invoicing saves resource effort and greatly reduces the entire process duration at the same time. We now produce a clearly articulated, accurate invoice for a billable repair that accounts for all expenses and includes before and after pictures within just 2 days of completion of the work.
Before we mail the invoice, we email a digital courtesy copy directly to the requesting customer and give them 24 hours to review and respond with any questions or concerns. Our customers now have the opportunity to evaluate the work we performed, the associated charges, and to inform us of any questions, clarification requests, or disputes they may have before we mail a copy to their accounting department for payment. If there are any problems, we are able to quickly resolve the issue and align 100% on the charges. Often times they even copy the accounts payable contact on their email response to confirm approval of the charges for payment to help the remainder of the process go smoothly.
Starkweather Roofing’s service technicians take before and after pictures of repairs, but we had rarely shared them with customers previously (unless asked). Because our customers rarely if ever actually see the roofs of the buildings they own or manage, we now accompany the photos with the invoice not only to demonstrate that the work was done, but so they can also see what exactly it is that caused their problem(s), get an idea of their roof’s overall condition, and view the quality and craftsmanship they are paying for. We have an online customer portal for customers to report leaks, monitor progress, view work history, and download invoices, warranty information, and more anytime from anywhere they have an internet connection. Our new policy is to always make these pictures visible in that online portal, and to do so as soon as the work order review is complete.
The invoice itself is generated immediately after the work order is validated and the pictures have been made visible in the customer portal. This end-to-end batch processing approach to invoicing saves resource effort and greatly reduces the entire process duration at the same time. We now produce a clearly articulated, accurate invoice for a billable repair that accounts for all expenses and includes before and after pictures within just 2 days of completion of the work.
Before we mail the invoice, we email a digital courtesy copy directly to the requesting customer and give them 24 hours to review and respond with any questions or concerns. Our customers now have the opportunity to evaluate the work we performed, the associated charges, and to inform us of any questions, clarification requests, or disputes they may have before we mail a copy to their accounting department for payment. If there are any problems, we are able to quickly resolve the issue and align 100% on the charges. Often times they even copy the accounts payable contact on their email response to confirm approval of the charges for payment to help the remainder of the process go smoothly.
We now mail (and in a growing number of cases, email directly to the accounts payable contact to save further on time and the costs of printing, paper, envelopes, and postage) invoices just 3 business days after completion of the work and accrual of expenses, and are extremely confident in receiving timely payment on 99% of them. Our past due receivables and associated collections efforts and expenses has been virtually eliminated. A dramatic improvement over the previous average, more often than not we are now paid for our services in half the time it took us previously to even create the initial bill. Cash flow in our service department is no longer an issue – on to the next improvement opportunity!
Additional Benefits Realized by Improving Cash Flow
Customer satisfaction has dramatically improved as a result. Our customers greatly appreciate the timely confirmation that their roofing problems have been resolved as well as their improved ability to understand and actually see the work performed, and being given an opportunity to review the bill before it is sent for payment. A once mundane and often painful aspect of any business relationship has evolved into a pleasant, eagerly anticipated interaction… and another key differentiator of Starkweather Roofing from the competition. Additional Benefits Realized by Improving Cash Flow
These email exchanges also provide an opportunity to interact positively with our customers on a regular basis and to gently remind and encourage them to consider our other service offerings such as preventive roof cleaning and maintenance, roof restoration, re-roofing, and new roof construction without having to further invest in traditional interruption marketing methods. During the work order review process we make note of the number of work orders for that particular building over the previous 12 months. If there are a certain number of non-repeat issues on a roof in the previous year, we specifically ask in the invoice courtesy review email if he or she would like us to evaluate that roof further and provide recommendations and budget figures for maintenance, restoration, and/or re-roofing. This natural dialogue, value-add approach makes our business development efforts much easier, cost significantly less, and our conversion rate on proposals initiated under these circumstances are much higher than normal.
How To Improve Cash Flow in Four Easy Steps
You can implement the same improvement principles in your company that Starkweather Roofing did to not only improve cash flow but at the same time reduce expenses, increase profit margin, generate new revenue, and improve customer satisfaction.
1. Regardless of when it will actually be sent, make it a priority to generate an accurate customer invoice in a timely manner. The longer it takes to create the bill the more likely it will contain inaccuracies, which lead to increased disputes and elongated time to receive payment.
2. Clearly explain what exactly the bill is for. Itemize and be as transparent as you can. We include the specific building name, address, and suite number(s), as well as tenant name(s) where applicable in addition to the description of work performed and subtotals for labor, materials, and service charge. We also make available the request date, date of service, and before and after pictures. We leave no doubt what exactly the invoice is for and how we arrived at the charges.
3. Provide the customer a brief window of opportunity to preview the invoice and specifically ask them to respond with any questions or concerns. Give them a short timeframe to do so before it is sent out for payment. Proactively resolving disputes require less time and effort than doing so reactively, and significantly decreases your outstanding receivables, collections, and write-off’s.
4. Take advantage of this natural opportunity to interact with your customers to educate them on the other products or services your company offers. Do this as seamlessly and non-sales like as possible. Where it is appropriate, we mention the number of times in past year that particular building had a roofing issue, what they’ve spent so far in total, an approximate cost of preventive maintenance, and specifically ask their permission to provide them with a scope of work and price for a less expensive alternative that proactively eliminates the opportunity for future leaks (if possible), and provide options for restoration or re-roofing where necessary.
These principles are applicable not only for B2B service companies, but also B2C (business-to-customer) and product-centric companies where the final payment amount isn’t predetermined. Just think if plumbers, mechanics, consultants, landscapers, or any number of other companies you do business with approached invoicing in this manner.
If you have any questions or would like to offer your ideas or best practices for improving cash flow, please leave a comment below or email me at Chris@StarkweatherRoof.com
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