Every barrel of oil generates several barrels of produced water (i.e., brine) and flowback. These liquids are environmentally dangerous due to their high concentration of salt, organic compounds, and chemicals. Consequently, they must be disposed of properly.
There is a large demand to haul and dispose of production fluids from wells. Companies in this segment can be very profitable when managed correctly. However, the hauling and disposal industry is also challenging. It is subject to the boom-and-bust cycles of the energy markets. Smaller and growing companies that aren’t financially well-prepared for these cycles risk encountering cash flow problems.
This article shows you how to fix the most common cash flow problem to ensure your company is well prepared to handle this industry’s financial demands. We cover:
- Expenses vs. cash flow
- Improve payments and collections
- Offer early payment discounts
- Financing options
- Putting a strategy together
1. Expenses vs. cash flow
The company’s ongoing expenses are usually high and must be paid periodically. These expenses include vacuum trucks, equipment, insurance, rent, disposal fees, and salaries. There are additional expenses if the company also operates storage tanks and disposal wells.
On the other hand, oilfield clients pay their invoices in net-30- to net-60-day terms. Net payment terms are common in the oilfield services industry but are also a source of financial problems. They leave your company in a difficult financial position. You must pay expenses out of the company’s cash reserves while waiting for clients to pay. For companies with small cash reserves, this situation leaves them vulnerable to cash flow problems.
Fixing your cash flow is simple. However, it requires patience and discipline. In the next sections, we discuss how to solve this problem once and for all. We start by looking at your payments and collections.
2. Payments and collections
The first step is to review company operations to ensure that cash is used effectively. Many cash flow problems can be solved by improving internal financial operations.
Manage expenses carefully and ensure that they are paid on time. Paying suppliers late can create problems down the road. If possible, work with reliable suppliers that are willing to give your company net-30- to net-60-day terms. Payment terms can be a great tool to improve your cash flow.
Review the performance of your company’s invoicing and collections. Ideally, the Accounts Receivable Aging Report should show that most of your outstanding invoices are within terms. Having a large portion of your accounts receivables beyond terms is a strong indicator that you have invoicing or collections problems. You can usually improve collections by using the following process:
- Check your customer’s commercial credit
- Require sign-offs
- Invoice shortly after completing work
- Verify that the invoice was received
- Contact clients if payment is late
- Use an attorney for collections problems
For more information, read “How to Deal with Slow-Paying Customers.” If improving your collections does not fix your cash flow, the next step is to use early payment discounts.
3. Early payment discounts
One effective way to improve your cash flow is to give selected clients an early payment discount. Discounts provide an excellent incentive for clients to pay quickly. In most cases, clients get a 1% to 2% discount if they pay their invoices within ten days. Otherwise, they have to pay the total amount on their usual terms.
Offer the discounts only to your best clients – those with good commercial credit. It’s best not to offer discounts to clients who are not good payers, since it could backfire. If early payment discounts don’t fix your cash flow issues, you should consider getting financing.
4. Financing options
Cash flow problems due to slow-paying clients are best handled with an accounts receivable financing line of credit. These financing solutions improve your cash flow, providing funds to operate the business.
Two solutions work well in the oilfield services industry: factoring and sales ledger financing. Factoring is often used by small and growing companies, usually those invoicing less than $200,000 per month. Larger companies typically prefer sales ledger financing.
a) Factoring financing
Invoice factoring allows you to sell your accounts receivable to a factoring company. The factoring company pays you for the invoice shortly after buying it. This sale gives your company immediate funds to operate the business and take on new clients.
Factoring companies finance your invoices in two installments. The first installment, called the advance, covers up to 90% of the invoice. It’s deposited into your account within a day of selling the invoice. The remaining 10%, less any fees, is deposited once the end customer pays for the invoice in full. To learn more, read “How Does Factoring Work?”
Average factoring fees range from 1.15% to 3.5% per 30 days, based on the volume of invoices you sell. The cost of factoring an invoice is usually prorated. Generally, invoice factoring works well if your company’s profit margins are higher than 15% and your invoices pay within 60 days. For more information, read “How Much Does Factoring Cost?”
Qualifying for factoring is relatively simple. In most cases, an account can be set up in less than five days. Companies must:
- Have creditworthy invoices
- Be free of liens
- Have capable management
b) Sales ledger financing
Also called a ledgered line, sales ledger financing works much like a line of credit backed by accounts receivable (A/R). Your company can draw funds up to a credit limit based on a percentage of A/R. The line is paid off as your clients pay their invoices on their usual terms.
Sales ledger financing works best for companies with a well-established invoicing department and an up-to-date accounting system. An up-to-date accounting system is critical to reconcile the line against your accounts receivable.
Lines are priced using a Prime Rate + X% model. The X% represents a rate that is added to the regular prime rate. The cost is usually based on a company’s 30-day financing average.
5. Putting a strategy together
The most cost-effective strategy to solve this cash flow problem is to use an incremental approach. Start by improving invoicing and collections operations. Selectively offer early payment discounts to your best clients when cash flow is tight. Lastly, consider financing if your company still has cash flow problems after improving operations.
Get more information
We are a leading factoring company and work with fluid-hauling and saltwater disposal companies. For information, get an instant quote or call (877) 300 3258.