“How can you tell if a transportation business is healthy?”
The answer is pretty simple. It takes a lot of moving parts to improve a transportation business, but right out of the gate, if I want to take a businesses’ pulse, there are only three things I need to determine.
1. Are Your financials in compliance with GAAP?
If you’re a transportation and logistics business whose financials look like a roller coaster, you’re in the majority. But it’s better to leave your highs and lows for the amusement park and do your financials according to Generally Accepted Accounting Principles (GAAP).
This includes recording transactions properly, matching revenue with expenses, and recording prepaid assets properly. There also need to be monthly write-offs for bad-debt as well as insurance claims – even if you don’t incur one in a given month.
If you follow GAAP, your financial performance should be pretty smooth each month, which gives you the ability to make a reliable forecast. It also means:
- Banks will offer lower interest rates and higher lines of credit
- Buyers will pay top dollar
- Customers will be more confident
If you don’t follow GAAP, your balance sheet will have spikes and dips, which will:
- Lead banks to offer higher interest rates or smaller lines of credit
- Deflate your valuation on sale
- Scare customers
When a business uses GAAP financials (prepared according to industry standards), it’s possible to benchmark them against competitors. The only way to know if your rates are high enough or your expenses are in check is through GAAP financials.
2. How’s Your liquidity?
Transportation is a capital-intensive industry. Expenses are large and money flows out the door day and night, for fuel and repair needs. No business can survive without cash, but transportation is the top example of this rule.
When I look at a company’s books, I want to see: are they prepared for a downturn in the economy? How are their receivables? Are they planning their cash flow? Do they have an appropriate-sized line of credit that will get them through tight spots? Will a large expense wipe them out? Will a great opportunity pass them by?
When I see problems with liquidity, it often has to do with improper management of receivables. Often, a struggling business will cut their collection staff when really, they should be beefing it up – a good collection person will pay for themselves quickly.
Aside from that, timely billing, proper invoicing practices, confirming rates ahead of time – all these good habits add up to make an impact on liquidity: first, because it means more cash in the bank; second, because banks will look at receivables to determine the size of the line of credit.
3. Are your financials grouped correctly?
In an industry where profit margins are tight, you need to ensure your expenses are in line with industry averages, and the only way to do that is to group them correctly. I recommend the following:
Purchased Transportation (83-86%)
It includes any cost to move the truck, and should be divided into these three subgroups, at roughly the following percentages, based online-haul revenue:
Driver, fuel and tractor (68-70%)
- Driver includes wages, taxes, benefits, workers’ compensation
- Fuel expenses include fuel, DEF (diesel exhaust fluid), and fuel tax
- Tractor includes depreciation or lease costs, repairs and maintenance, tires, plates, taxes, insurance.
Trailer (7%)
Insurance and claims (4-5%)
Other (1%)
Operating Expenses (11%)
Operations (7%): your wages for dispatch, load boards, sales and marketing, travel to see customers.
Admin expenses (4%): wages and benefits of the billing department. Other typical admin expenses include safety wages/benefits, recruiting, facility, office supplies, dues/subs, as well as meals and entertainment.
Cost of money (1%)
Cost of a line of credit or interest for equipment purchases
The only way to monitor and improve expenses is by isolating these groupings. It’s also the only way to determine the real cost of taking a job. Finally, it allows you to compare various divisions in your company: company-owned assets, owner operator fleets and logistics. Look at those various classes together and you can see which one’s doing better.
Signs of a Healthy Business
It’s rare to find a business that manages its own finances and is able to take care of all of these foundations on their own. And it’s pretty safe to say that it’s the reason why businesses grow to a certain point and then end up getting stuck.
Usually, getting these things in order is where I start when I take on a new client. Once you put in the up-front work to address these issues, then it becomes possible to dig in deeper and identify some quick wins and some long-term opportunities to work towards. Learn more about Virtual CFO Services today.