When it comes to growth strategy, oilfield service companies can take a lesson from operators. Even before the market took a nosedive in 2020, E&P companies had to turn their focus inward to find sources of free cash flow to fund growth. One area of focus is digitalization of processes with cloud technology solutions. Digitalization enables faster, more collaborative workflows — like invoice submission and ticket approvals — between different stakeholders, increasing operating efficiency. It also provides valuable operations data to guide your decisions for your business.
With the pressure of reduced activity and price cuts, oilfield services must reduce expenses to align with revenue and optimize cash flow. Long payment cycles from customers mean you pay expenses faster than revenue is received. Below are ways you can optimize cash flow and minimize the impact of price cuts and less revenue.
What can I do to protect cash flow?
You can protect your cash flow in two ways. Minimize DSO and look for opportunities to increase efficiency in your billing processes. We cover how to do this below.
What is DSO?
A way to measure how long it takes you to get paid is days sales outstanding (DSO). This metric is the number of days from when you submit the invoice to your customer until you receive payment. There is an additional part called invisible DSO, the time between when you provide the product or service and when the invoice is created. Invisible DSO can be days or weeks, and it costs your business money. The combination of invisible DSO and “traditional” DSO is known as effective DSO.
Why is minimizing effective DSO important?
If you focus on minimizing DSO, you get access to cash quicker. Access to cash allows more opportunity for reinvestment. Successful management of effective DSO also gives investors confidence, indicating a well-run enterprise. Think about creative ways to invoice and get paid faster. Why? Because billing terms begin the date of the invoice. But expenses, like payroll, vendor bills and credit card bills, occur in real-time. You won’t receive payment for the services you provide until weeks after you submit an invoice to your customer depending on your billing terms. That is why it is critical to invoice as soon as possible after the work is completed.
How can I reduce invisible DSO?
- Invest in a digital field ticket solution. Most people do not think about adding a software solution to their operations during lean times; however, it will pay for itself very quickly by reducing your billing time. Slow times can be the best opportunity to introduce new solutions, since the training and processes will be in place once activity expands again. Customers using the Enverus Oilfield Services Suite FieldTicket application reduced their DSO from months to days.
Watch the video to see how Elite Production Services streamlines its operations with the Oilfield Services Suite.
How can I reduce DSO?
- Early pay discounts give a percentage discount for customers that pay early. You do this because cash is so important you are willing to give up a few percentage points to get paid faster. Several OFS companies are increasing their early pay discount percentage to as much as 10% to get paid faster. The discount you give depends on your specific business, profit margins and any debt payments you must make. This tool can drive faster payment, especially if your customer asks for a price reduction anyway. You should always get something of value if you are giving something. In this case, you give up percentages of your revenue through price cuts, so if you turn that into an early pay discount, you have now gotten something of value in return.
- Invoice factoring. Another way to minimize DSO is to finance your invoices from a third party. Commonly called invoice factoring, this simply means that once work is complete, you submit your invoice to a factoring company and receive payment on the invoice from them less a small fee. The company then collects payment from your customer. a trusted partner of the OpenInvoice network, helps service companies transacting on OpenInvoice bridge cash flow gaps by advancing payments for outstanding invoices within one business day.
How can we become more efficient in our billing processes?
To remain competitive, service companies need to operate and function more efficiently than in the past. While market activity is picking back up, you should still focus on how to do more with less — fewer resources, less cash and maybe less overhead support. The only way to accomplish this is by being efficient. Here’s what we recommend.
- Streamline repetitive tasks. Look for repetitive tasks. Are you sorting through stacks of paper or big, complex Excel spreadsheets to get information? These simple things cause delays in processes that eat up hours or days. All of these are opportunities to become more efficient. If you find yourself entering the same information in two or three different places, this can be very time consuming and expensive. Many service companies use QuickBooks as their accounting system, but also must enter ticket or invoice data into a billing portal for their customer. You essentially enter the same information twice for every single invoice. There are apps, like Enverus Supplier Link, that will send the data from QuickBooks to OpenInvoice and other billing platforms automatically. That saves you tons of time by only needing to enter the data once into QuickBooks.
- Invest in software. Digitalization of back-office processes with technology is a proven way to increase efficiency and save money. Maybe you could use a dispatch app to manage jobs, a payroll app to capture hours for payroll or an electronic field ticket solution. Again, most people do not think about adding a software solution to their operations during times like this, but if you can reduce your invisible DSO from days to just hours, the investment will pay for itself very quickly.
We’ve all had to adjust to these market events. By focusing on increasing efficiency in your billing and operations processes, you can reduce DSO, protect your cash flow and do more with less. Your business will benefit by these improvements in the long-term and set you up for future growth.
About Enverus OFS solutions
Enverus OFS solutions empower OFS companies to find deals faster and optimize operations so you can grow your business, reduce DSO and get paid faster. To learn more or request a free demo, fill out the form below.