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Fitting the Pieces Together: A Guide to Office Operations for the Liquid Waste, Portable Toilet & Septic Pumping Industries |
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The portable toilet rental business is a invoicing challenge. Some companies invoice in advance of the service provided, some in arrears, i.e., after the service is completed, at the end of the month. This strongly effects how you can handle a partial invoicing period when a customer calls to have a unit picked up.
When a customer calls to have a unit picked up, it is rarely on the last day of the billing cycle. This usually means that the customer either owes you money or you may possible owe the customer money for the time the unit was no longer in service, i.e., picked up. Let’s first look at the when the customer owes you money.
This can only happen when you invoice in arrears. Invoicing in arrears is actually invoicing the customer after the service has been completed. This policy can leave your company open to several potential business problems:
Non-payment
Since the customer no longer needs your service, why should he pay you?
Cost of Money
When you bill in arrears, it is like making an interest free loan to your customer. You have paid for the unit, the delivery, service and equipment costs, i.e., trucks, and received no money. Maybe you need to use the word "BANK" in the name of your company! Since people usually pay bills at the end of the month, it could be two months before you are paid so that 1/6 of your total revenue is outstanding at any time and this does not even include customers who do not pay their bills on time.
Let’s look at how much this can be. Assume your company has a gross sales of $240,000 per year or $20,000 per month. Two months is $40,000 of your money on the street, which, at 10% interest, is $4000 per year you are not making on that money. OUCH!!!!
Why do businesses bill in arrears? For some, it is tradition in their area, or it is because they started out in the tool rental business which is typically billed in arrears. For others, it is simply a habit that was begun without a clear reason.
If you are invoicing in arrears and plan to continue this method, what policies are available to your company regarding the early pickup of a unit? Some common practices that we have come across include:
One Month Minimum Billing
You bill on a one-month minimum. If the unit is on site for any portion of the month, it incurs a full month charges. This is a tough policy to enforce, but does help with customers who keep a unit for an extra weekend,e.g., July fourth, and then call to have it picked up. (A cheap special rental.)
Two Week Minimum
Pickups before the middle of the month incur a two week minimum charge, after the middle of the month, a full month rental/service is charges. This policy is easier to enforce, in that a customer can understand that the costs of running your operations, i.e., invoicing, purchase of units, pickups and deliveries, need to be covered.
Different Rates Based Upon Length of Use
This approach is to charge different amounts based upon the number of days/months the unit is in use. Shorter periods incur a high monthly rate. This makes a lot of sense to most customers and they generally feel comfortable is that the longer they use the unit, the lower the rate. Typically, companies use three months as a break point for a lower rate. Combining this policy with either a daily rate if over three months and a minimum billing for less then three months, allows you to recover your cost of service, pickup and delivery for shorter term rentals and still invoice longer term customers for actual usage.
Whatever policy you choose to implement, it is a good idea to bill quickly so that your money does not stay on the street.
There are at least three ways you can handle this situation.
Issue a check
Issue a credit against further service with or without an expiration date
Use a minimum billing policy so that no credits are due
Let’s look at each of options to get a feeling for the advantages and disadvantages of each credit policy.
Issue a check
Customer has paid for a service, returned the unit early and has a balance due. Your policy is that if the customer does not use the balance within 90 days a check is issued to credit the account to zero and return the money to the customer.
The positive aspects of this policy are:
Easy to understand and explain.
Allows for balance to be used on next job for "regular customers".
Easy to monitor activity to determine "actual cost" to guide future policy decisions.
On the downside, you can be impacted by:
Administrative costs of sending out lots of little checks.
Giving back money your company has already booked.
Increased cost of operations without the associated revenue because of early pickup.
Issue A Credit Against Further Service With Or Without An Expiration Date
One you receive a check the money is yours. If a customer calls for an early pickup, you can issue a credit that remains active for a year and then expires if not used. Your customer understands that you need to recover your fixed costs and the money is still available for future use of services.
The positive aspects of this policy are:
Easy to understand and explain.
Allows for balance to be used on next job for "all customers".
Once money is received, it is yours to keep.
On the downside you can be impacted by:
Finding the tools and administrative costs of monitor expiration of credits.
Customers who terminate rental during early part of the month with no potential further use can feel as if they have paid for a service they never received.
Minimum Billing Policy So No Credits Are
In this approach, you do not issue any credits because the customer pays for the whole period. If a unit is used any portion of the month, the billing for the total month is due. This policy in conjunction with a variable rate with length of service and an explanation that the unit was not available to rent to other customers can help a customer understand that money is spent on invoicing and reserving company resources to service the unit in advance that is dependent on the monthly billing to cover costs.
To wrap up, you can see that you have several options available to your company. Which ever you choose to use, it is a good idea to retain a lawyer and to write your terms and conditions in a clear manor. A little time and money invested in good communications can save a lot of aggravation and bad will.
A company policy should handle 99% of the cases. However, there are sometimes exceptions which need special treatment, so you should always be sensitive that when it comes to money, what seems like a small sum to you may in fact be a significant amount of money to your customer.