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The U.S. Postal Service decision to end next-day delivery could add tie up millions of dollars in working capital.
David M. Katz, CFO.com | US
January 13, 2012
Delivery by letter carriers seems so old-fashioned that it's been called "snail mail" for years. Yet, as it turns out, most of Corporate America's invoices still get delivered that way. And the U.S. Postal Services December 5 decision to move first-class mail to a two-three-day standard seems sure to slow down bill collection for companies large and small.
Indeed, the move could cost a U.S. company with $10 billion in revenues up to $100 million in working capital each as a result of its impact on accounts receivable, according to Veronica Heald, a practice leader at REL Consulting, a division of The Hackett Group that focuses on working capital. (CFO is developing a working capital benchmarking product in partnership with REL.)
The impact of the mail delay will be felt in at two ways, says the consultant, who estimates that 60% of payments received in the United States are via checks in the mail. There will be lags in both the distribution of invoices as well as in the receipt of payments.
Those effects will each add a two-day delay, resulting in an in a typical increase of four days sales outstanding (DSO). (The metric is defined as year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue. A decrease in DSO represents an improvement, an increase a deterioration.)
The delays should have a much greater effect on smaller companies, which tend to have less wherewithal than bigger companies do to make the technological changes needed to minimize the impact, according to Heald. In an interview with CFO late last year, she listed some steps companies can take to cope with late delivery.
Switch to e-mail or EDI. Since e-mail is the cheapest way to transmit docs, stop licking stamps and start hitting "send." While making that transition might be fairly cheap for a large company, it can involve a great deal of administrative work. For instance, a company would have to contact the accounts-payable department of all of their customers, they need to contact the a/p department to sure customers are set up to be able to receive invoices by email. The biller needs to set up an in-box and establish that it's someone's job to acknowledge payment was received and that "it's not going to go in some black hole," Heald says.
Another alternative is to install electronic data interchange. EDI can be faster than email in that it can replace invoices and checks with electronically sent messages. The software can be costly, however, and corporate users must make sure their clients have the software as well
Watch out for paper pushers. Some customers might ask to continue receiving paper bill as a delaying tactic. In such cases, they might not be calculating their duty to pay from the date they received the bill - not from the invoice date, as many contracts require. The added four days of delivery will only exacerbate the problem. To avoid this, companies should clarify with their customers what the terms of the contract really are.
Bill immediately. Many companies conduct their billing as a weekly or monthly exercise. "When treasury comes knocking at the door at the end of the month, everyone thinks it's time to put on their invoicing hat, and they get all their invoices out the door the last two or three days of the month," says Heald.
"What they've done is to extend their terms to their customers informally. Now that we're going to have added delays from in mail, it's more important that they become that they bill at the earliest possible time stated by contract," she added, "and that the invoice will be shipped upon receipt of the order.