Incentivizing Your Way to Success Part II – Targets for Accounting/Billing Associates
Last week, we discussed best practices for implementing Performance based pay structures within your trucking operation with the ultimate goal of imrpoving Gross Margin AND Net Margin. In order to implement appropriate incentives, you have to first decide which targets to use (based on role/responsibility/department). As a reminder, the targets you implement for your associates need to be: 1) Understandable and easy to calculate, 2) Improve the financial health or lower the risk profile of the company 3) Within the realm of control of the associates, and 4) Give high-performing associates the chance to earn more than they were previously able to.
Over the course of the next five weeks, we will be providing examples of targets/measures you can examine for each of the following departments: 1) Accounting and Billing, 2) Operations/Fleet Management, 3) Shop/Maintenance, 4) Recruiting and 5) Safety. For this week’s article, we will focus on accounting and billing. The reason I want to focus on this group is that many companies do not have ANY type of incentive/variable compensation for those in the Accounting and Billing. In my opinion, this fact reinforces the general idea that accounting and billing is just a series of tasks on a checklist that stays within a narrow range of performance. This is absolutely not the case! Based on our data, the high performing fleets have exceptional Accounting and billing teams. They have low Days Sales Outstanding (DSO) results (typically in the 28 to 32 day range on average), and have very little lag between deliveries and accurate invoices AND a high rate of accessorial capture. A great accounting team has the ability to dramatically improve your cash flow.
With this in mind, here are some measures you can consider using for implementing a Performance based pay structure for your accounting and billing teams:
- Days Sales Outstanding (DSO) – Many companies simply aren’t tracking their DSO numbers religiously. For any company, regardless of industry, if you’re not being prepaid for your service, you need to start doing so right away. The formula for this measure is: (Current Accounts Receivable including Linehaul, Accessorial and FSC / Period Total Revenue) * # of Days in Period. Prior to implementing a proposed target, you may need to finally write-off those ‘doubtful accounts’ that have become ‘not a chance” accounts. Further, as additional targets within this topic would be the % of receivables that are paid within 15, 30, 90 days, and then establish target ratios to maintain. By improving on these values, your invoicing lag will undoubtedly improve, as will your utilization of EDI.
- % of Accessorial Revenue Capture – From company to company, there are some pretty dramatic differences in levels of accessorial revenue. Obviously these results can be a direct result of the type of freight you’re hauling, and the way you charge your customers. However, it is safe to say, that all companies can improve the percentage of accessorial opportunities that convert to revenue. A simple KPI, would be to track the percentage of Accessorial Revenue on weekly or monthly basis versus your linehaul revenue and/or Total Revenue. By improving on this KPI, you will definitely see higher gross margin and more importantly improved communication between accounting and operations.
- # of Bank Reconciliations Completed During Month – I’m a big believer in daily (yes daily) bank reconciliations. Daily bank recs reinforce discipline within accounting and can drastically improve internal processes that have a collateral positive affect on other departments. Further, chances of inefficient cash management and potential fraud are greatly reduced. All accounting systems have many tools available to allow you efficiently handle daily bank recs and report to interested parties (which would be me if I was the President).
These are just a couple, hopefully it got you thinking about additional measures specific to accounting which you can use to motivate top accounting performers!