Trucking is a tough business. Just ask anyone who has either tried to start a trucking company or who owns a successful operation. According to Entrepreneur Magazine, 40 million businesses are started each year in the United States, and “a meager 350,000 actually grow and make money.”
That’s just nine-tenths of one percent that actually make a profit in the first year. Now that doesn’t mean the other 99.1% all fail. Three out of four businesses that start each year make it to the second year, reports StatisticBrain.com; however, by the fourth year, 56% of those businesses have failed.
What are the numbers for trucking companies? Again, according to StatisticBrain.com, by year four, 55% of those new carriers will be out of business.
What are the major reasons (and what led to them) contributing to the majority of business failures in that four-year period?
1. Incompetence (The cause of failure for 46% of businesses)
Emotional pricing. This means the businessperson made pricing decisions for their services based on his or her feelings and not on a cost-plus-profit margin formula.
Owner’s pay exceeds what the business will support. This indicates the owner didn’t look at sustainability and growth for his company and most likely was taking whatever was left over after all the monthly bills were paid; in essence, stealing from the future of the company. Profit is meant for sustainability and growth. Salary must be an expense and absolutely be no more than what another person would be paid to do the same job.
Lack of planning. Going into business without a definitive business plan is like starting a trip with multiple shipment drops without looking at a map and with GPS turned off. You never know where you’ll end up.
No experience in recordkeeping. This is often the root of the other failings. Not knowing your numbers (which come from quality recordkeeping) causes a domino effect throughout the business. You’ll have no idea how to price your hauling services, no idea what you can pay yourself in salary, and you’ll lack the facts and figures needed to plan.
2. Unbalanced experience or lack of managerial experience (30% )
Poor credit-granting practices. One of the first mistakes many new carriers make is granting credit to shippers and brokers without fully investigating their credit histories. The fastest way to go out of business is to run out of operating cash when you have loads to haul. This is called cash flow; it’s the money that a business uses to pay its bills.
An effective way for a small carrier to manage receivables is to have a factoring company handle the invoicing and collection. The factor will have the infrastructure to know the creditworthiness of any shipper or broker with whom you’d like to haul freight, and to what level they can be indebted to you that will ensure timely payment. A factor will also ensure you receive the amount of the invoice, less a small fee, to keep your cash flowing and your trucks rolling.
Expanding (growing) rapidly. Growth requires capital—bucket loads of it. The cost of adding more trucks far exceeds just the cost of a tractor and trailer. Hiring a driver, obtaining insurance, getting a base plate and permits, and finding the necessary loads are just some of the additional costs. Each truck multiplies the operating costs, such as paying the driver and buying fuel.
Typically, it takes three months for a truck and driver to be self-supporting. Having the opportunity to expand doesn’t necessarily mean it’s time to grow. Expansion needs capital and advance planning.
Inadequate borrowing practices. This is one area where careful planning is critical. Be careful how much you borrow and from whom you borrow, and pay attention to the terms and interest rate.
“Never borrow more than you need, and only borrow when your business will generate a profit when the borrowed money is invested into your company,” one business finance professor instructed his students. “You need to look for the ROI on borrowed money in the same way you’d look at any investment. That return must exceed the cost of the loan (principle and interest required to pay it back).”
3. Lack of experience in the trucking business (11%)
Inadequate number of loads. Not having the loads to produce revenue to keep a company moving forward is one of the bigger mistakes made by new entrants into the industry. Many think they can rely strictly on load boards, but it takes a three-pronged approach for the micro-trucking company.
The first prong is a quality direct shipper contract, where the trucker receives a retail freight rate. This contract doesn’t involve any third parties; the relationship is directly with the shipper.
The second prong is a list of quality freight brokers that the trucker can rely on to provide freight that’s profitable for the trucking company. This is considered wholesale freight since a third party receives a portion of the hauling revenue.
The third prong is the load boards. They typically pay the lowest rates because there is no relationship between the motor carrier and the shipper or broker. Since a working relationship doesn’t exist, there is no desire on the part of the shipper or broker to pay top dollar.
4. Neglect, fraud, or disaster (1% )
These three reasons are really self-explanatory. You can control neglect and fraud with foresight and planning, and through careful hiring practices of employees and contractors. You never know when disaster will strike; therefore,you should purchase adequate liability and property insurance. Don’t forget to purchase life insurance on any vital personnel.
Avoid—or at least minimize—these mistakes, and success is far more likely.