The proof and formulas to calculate the cash increase from billing efficiencies (August, 2024 revised)

Cash flow can make or break a business. For many field service providers, a significant barrier to achieving healthy cash flow lies in the time it takes to get paid for services rendered in the field.

This challenge is especially pronounced in industries like oilfield services, where customers and operators impose intricate and unique requirements for verifying work before releasing payment. These requirements can range from obtaining signatures, special stamps or coding on field tickets, to requiring invoice packages in which signed field or delivery tickets with images, all need to be separated and sorted according to the customers' specifications and uploaded through designated portals.

The Challenges with Manual Billing

To meet customer demands, many oilfield service providers still perform the invoicing process manually, without fully realizing the impact this can have on cash flow and its ability to finance the growth of the Business. When the invoicing and billing process is automated, cash flow can increase significantly, without requiring any change in the customers' payment behavior.

Let's take a deeper dive into the challenges posed by manual billing and how automation can be a lifeboat to struggling businesses or a catalyst for growth.

Deciphering Handwritten Field Information

Field service providers often use handwritten field tickets describing the work performed in the field, the equipment used, the inventory consumed, the expenses incurred, and the labor hours expended. This information is often necessary for billing, equipment maintenance, etc. yet when handwritten, can be notoriously difficult to read. Translating them into an understandable format is not only time-consuming and an inefficient use of staff labor. It is also mistake prone, especially if field personnel are trying to assign the correct billing codes for the work performed, apply customer-specific pricing – all from memory.

Data Entry Issues

Once deciphered, the field data must be meticulously entered into internal ticketing or invoicing systems and those of their customers. This step alone can consume countless hours, especially when dealing with a high volume of transactions. As the company grows, the billing department grows with it. The risk of data entry errors looms large, potentially leading to invoicing discrepancies and customer disputes

We’ve seen clients with drawers stuffed with handwritten field tickets, waiting to be entered and invoiced. They had been set aside since more research and correction was needed before they could be sent to the customer. Some were over 2 months old.  When invoices are finally prepared (late) and billed to the customer, it’s not just cash flow that suffers, but also revenue since late invoices are more difficult to collect.

Cross-Referencing Complex Agreements

The complexity of customer agreements is another hurdle. Billing teams must cross-reference pricing and service agreements to ensure accurate invoicing. Any deviations from these agreements can lead to disputes and delayed payments.

Crafting Invoices from Excel or Word

Creating invoices with Word or Excel is also a labor-intensive process. After invoices are created, they must still be entered into the customer’s ticket and/or invoice systems, as well as into an internal accounting system to track accounts receivable, revenue, taxes, aging and payments. This manual approach not only increases the risk of errors but also consumes valuable time unnecessarily.

Uploading to Customer Portals

Many customers and operators insist on invoices being uploaded to their designated portals. This requirement necessitates extra steps, often involving additional data entry and document management. Failing to meet these portal requirements can result in payment delays and customers frustrated for not having timely information on the work performed at their sites.

The Promise of Automation

Thankfully, for most oilfield service providers, a solution lies in automating the field ticket and invoice preparation and delivery/billing process. Despite skepticism from some quarters about the material impact of automation, or concerns about the complexity of their billing processes, the reality is that software available today can automate most billing processes to the point of removing days or weeks out of this process.  

CBSi's ofsERP® extension for Microsoft Dynamics 365 Business Central Essentials has demonstrated remarkable success in automating billing processes, from the simplest to the most intricate.

Real-world results:

The CFO of an oilfield services client referred to the results of our invoice automation preparing custom invoicing packages meeting the needs of his large clients a “Game-changer!” as his company grew from ~$18m to ~$100m in revenue, without a corresponding increase in his billing department.

Another OFS client told us that the number of days they were able to shave off the invoicing process (1) increased cash flow in the 1st 12 months by an amount far exceeding the total investment with us in software licensing, data migration, and implementation, and (2) enabled him to confidently reduce his line of credit, saving ~$200,000 in annual interest expense.

Reduced Operational Costs

One of the immediate financial benefits of automation is a reduction in operational costs. With manual processes, you often need a larger billing team to handle the workload as you grow. Automation streamlines tasks, allowing you to allocate resources more efficiently and trim unnecessary overhead expenses.

Faster Payment Collection

Automation accelerates the entire invoicing and billing processes in scenarios in which the terms of a sale are based on Net terms (not prepaid, or contractually defined otherwise). Invoices can be generated quickly and accurately from electronic field tickets, delivery tickets, or other sources, and can often reach your customers with an invoice date days or weeks earlier than with the manual process.

In this example, field service work is performed on payment terms of Net 30 days after the invoice date, for a customer who typically pays 10 days late, 40 days after the invoice date. If you can honestly and ethically generate a proper invoice dated 15 days earlier, then you will be paid 15 days earlier (all other variables remain the same). The customer can continue to pay 10 days late, 40 days after the date of the invoice, but he will be paying 15 days earlier than he paid previously.

I say “honestly, ethically, and according to financial accounting standards” because we’re not suggesting or condoning pre-dating invoices before performing the work or before delivering equipment to the field. The key principle refers to reducing the number of days it takes after the work has been performed and/or product delivered to gather the information needed to prepare a proper invoice, receive internal and external approvals, and place it into the “hands” of your customer.

Observe from the above example, that both the actual terms of each customer, and the # of days he pays late (or early) has no impact on our ability to get the invoices created and, in his hands, sooner. The actual terms of the customer could be Net 10,5,20, or any net terms, and, as long as they remain unchanged, they do not affect cash flow.

Fewer Billing Disputes

The accuracy and consistency offered by automation means fewer billing disputes. When your invoices align precisely with customer agreements and expectations, there are fewer reasons for customers to dispute charges. This leads to smoother transactions and fewer delays in delivering a proper invoice into the customer’s hands (or designated portal).

Less Management Time Spent on the Invoice Approval Process

Automation frees up your team's time and energy, allowing them to focus on strategic activities that drive growth and innovation. Management at various approval levels no longer must spend hours, pouring through invoices to validate coding, pricing, calculations, missing bill lines, etc. With fewer hours spent on these tasks, they can engage in more value-added tasks, ultimately enhancing your competitive edge.

Proving the Cash Flow Impact

First, we'll prove that shaving days off this process leads to a tangible increase in cash on hand, by examining changes in the Accounts Receivable balance, provided other factors remain unchanged.

Next, we will provide a shortcut calculation that results in the same change in cash on hand.

Imagine a scenario where you reduce the processing time for invoices by 15 days, while keeping all other variables constant. This common reduction period, especially in the oilfield service industry, consistently results in a remarkable boost to cash flow.

Figures 1 and 2 serve as our guides, utilizing a fictitious company with $30,000,000 in annual sales, of which $28,000,000 is sold on net terms. Both figures illustrate three scenarios: reducing the invoice preparation and delivery process by 5, 15, and 25 days.

Figure 1: Proof of Cash Flow Impact by Change in A/R

Figure 1 illustrates that in an environment where the time to prepare and deliver a proper invoice can be reduced by 15 days (typical in the oilfield service industry), the Accounts Receivable balance decreases from $5,000,000 to $3,849,315, a credit of $1,150,685. To maintain financial balance, this credit (reduction to Accounts Receivable) needs an offsetting debit of $1,150,685 which can only reasonably be the asset, cash on hand.

Figure 2: Shortcut Formula with the same results

Figure 2 unveils a convenient shortcut—a mathematical formula that simplifies the process of calculating the increase in cash flow resulting from automation. What's remarkable about this formula is that it doesn't require the intricacies of Accounts Receivable balances. Instead, it requires only 2 variables to calculate the increase in cash on hand: 1) the # of days reduced in the invoicing process, and 2) the dollar amount of annual sales sold on net terms.

The Numbers Speak Volumes

This underscores a fundamental principle - that the increase in cash is indeed substantial when the invoicing process is optimized, and  that cash flow is increased for each day you can shave off the invoicing process.

As illustrated, a 15-day reduction translates to an approximate 4.11% increase in cash flow, calculated as a percentage of sales made on net terms. Simply put, for every dollar of sales conducted on net terms, a 15-day reduction equates to a 4.11% surge in cash flow. It's not just a marginal improvement; it's a substantial financial transformation.

But the beauty of this principle lies in its adaptability. Whether you're considering a 5-day reduction, which still yields a notable 1.37% increase, or an ambitious 25-day reduction, leading to a remarkable 6.85% cash flow boost, the message remains clear—Invoicing and billing automation has a tangible and direct positive impact on cash flow, and the amount can be calculated in advance.

It's not just about cash flow; it's about securing financial stability and positioning the company for growth in a highly competitive industry.

Unlocking Your Full Potential

The key to unlocking your full potential goes well beyond efficiently automating the invoice creation and billing process to increase cash flow, it involves optimizing all financial and operational processes companywide.

By embracing automation, businesses can experience significant increases in performance, growth, and market share.

With real-time access to financial and operational data, you can make informed decisions, allocate resources effectively, and seize opportunities with confidence.

Using Microsoft Dynamics 365 Business Central provides these results, and can also protect your business from internal threats. Hosting directly by Microsoft, provides significant protection against external threats. IT infrastructure costs are reduced to near zero, as access to the entire business application and all related data is fully available in the cloud with an internet enabled phone, laptop, or tablet.

Automation empowers you to optimize your operations, streamline your processes, and gain a competitive edge in a challenging landscape. It's not just about staying current with industry trends; it's about taking charge of your financial destiny.

It's a strategic move that positions you for long-term success and growth.

Transform your entire field service business one step at a time. Take the first step by contacting us today.

(972) 612-1122 info@cbsi-corp.com