Cash flow is the lifeblood of any business, and third-party logistics (3PL) companies are no exception. Effective cash flow management is essential for the success of a 3PL business—in both the short term to increase working capital and in the long term to fuel business growth and expansion.
In this blog, we'll explore the importance of cash flow management for 3PL businesses and provide practical tips for managing cash flow effectively.
The Relationship Between Cash Flow and Your WMS
In the 3PL industry, cash flow can be effectively managed through warehouse management system (WMS) software. A WMS provides the data that 3PL companies need to accurately and efficiently bill and invoice their customers. In addition, the WMS provides data that includes information on inventory levels, personnel efficiency, order processing times, and transportation costs.
The accuracy and efficiency of digital billing and invoicing, as well as collections, are crucial for cash flow management. If invoices are inaccurate or delayed, it can lead to payment delays and strain cash flow. A WMS can help 3PL companies avoid these problems by providing real-time data on order processing and inventory levels, enabling them to promptly and accurately invoice their customers.
In addition to billing and invoicing, a WMS can also help 3PL companies manage their cash flow by providing valuable insights into customer demand and inventory trends. By analyzing this data, 3PL providers can make informed decisions about inventory levels and pricing, ensuring that they have sufficient cash reserves to cover any temporary gaps as well as understand the potential need for more warehouse space and/or expansion.
Managing Accounts Receivable
Managing accounts receivable (AR) is one of the biggest challenges that 3PL companies face when it comes to cash flow management. 3PL businesses often operate on a net-30 or net-60 payment basis with their customers, meaning that there can be a significant gap between the time of service and the time of payment. There can also be a gap based on the time the services are rendered and the time the invoice goes out. Due to this gap, cash flow can become strained—especially for smaller 3PL businesses.
To manage this challenge effectively, 3PL companies need to have a robust accounts receivable process in place. Here are some practical tips for managing accounts receivable:
- Adopt Clear Payment Terms: It's important to establish clear payment terms with customers upfront. This includes specifying the payment due date, the payment method, and any penalties for late payment. Clear payment terms can help avoid confusion and ensure that customers understand their payment obligations.
- Accept Digital Payment Options: It's essential to remove any possible hurdles for customers to pay their invoices. Accepting both ACH and credit cards is another way to remove friction for customers that may also have a tight cash flow business model. Offering digital payment options can cut the time between payments in half while also providing customers’ additional time to pay if they use a credit card.
- Offer Early Payment Incentives: Offering early payment incentives can be an effective way to encourage customers to pay their invoices promptly. This can include offering a discount for early payment or other incentives. Early payment incentives can help 3PL providers manage their cash flow by encouraging customers to pay their invoices more quickly.
- Leverage Automated Invoicing and Payments: Implementing automated invoicing can help 3PL companies streamline their accounts receivable process and ensure that invoices are sent promptly. Automated invoicing can be done through your WMS and can save time and reduce errors compared to manual invoicing or relying on outside technologies.
Minimizing Inventory Costs
Effective inventory management is critical for maintaining healthy cash flow. 3PL companies need to keep a certain amount of inventory on hand to meet customer demand, but carrying too much inventory can tie up valuable space. To minimize inventory costs, 3PL companies should optimize their inventory levels based on customer demand, historical sales data, and lead times. Additionally, 3PL companies can leverage warehouse management software to automate inventory management and improve accuracy.
Controlling Operating Expenses
Another critical aspect of cash flow management is controlling operating expenses. 3PL businesses have various operating expenses, including transportation, labor, and technology costs. To maintain healthy cash flow, it's important to carefully control and manage these expenses. This can be achieved by negotiating favorable rates with suppliers, streamlining processes, and implementing cost-saving measures wherever possible.
3PLs need to have a WMS that seamlessly and accurately tracks and records all billable events to ensure they are covering the operational expenses of servicing the customer. This data can also be used to track the profitability of each customer, which can be used in negotiations and business planning.
Planning for Growth
3PL providers need to plan for growth carefully, as expanding too quickly can strain cash flow. Developing a comprehensive growth strategy that considers cash flow needs is critical for sustained success. This includes projecting revenue and expenses, assessing the impact of growth on cash flow, and planning for contingencies. By taking a strategic approach to growth, 3PL businesses can minimize cash flow gaps and achieve sustainable growth. A robust WMS system is critical to executing the growth strategy.
Elevate Your Cash Flow Management with Extensiv
Effective cash flow management is essential for the success of a 3PL business—and Extensiv offers tailored solutions for 3PLs that enable third-party logistics warehouses to thrive as industry leaders.
By managing accounts receivable, minimizing inventory costs, controlling operating expenses, and planning for growth, 3PL businesses can maintain healthy cash flow and achieve sustained success. With the help of Billing Manager, a standard feature in Extensiv 3PL Warehouse Manager, 3PL businesses can optimize their operations and achieve even greater efficiency and profitability.