Calculated Growth

Calculated Growth

Expansion can quickly derail any business

There's a point in every trucking company owner's life when the question comes up: Is it time to expand? This question comes from desire and need; the desire to take more market share, and the need to take advantage when opportunity comes knocking. This can and will happen regardless of how large or small your company is.

Growth comes in several different packages: adding trucks/trailers and employee drivers; expansion through hiring lease operators; or creating greater net worth without enlarging your fleet by increasing revenue while decreasing expenses.
Possibly, growth can come in the form of the combination of all three. So, what does growth entail? Here are some steps to achieve expansion of your company.

First, you must have a strategic growth plan that  details the following:

  1.  How much capital (money) do you need to sustain the operation in times of reduced business? This is called your capitalization point.
  2.  How much cash must be put aside to acquire the needed trucks, trailers, facilities and/or other equipment to expand the business?
  3.  What personnel will you need to bring growth online and then sustain it?
  4.  How long will it take for a new piece of equipment to generate positive cash flow?

In determining your capitalization point, you must have enough reserve cash to cover all fixed costs for 18 months. This needs to include salaries for essential personnel and  you, the owner. The easiest method to calculate this figure is to multiply your annual fixed cost by 1.5 to reach your minimum capitalization point.

For example, use an annual fixed cost of $200,000 and multiply by 1.5, which equals $300,000. The $300,000 becomes the capitalization point.
Next is to ensure you have enough cash to obtain the required equipment. Determine the amount of money you’ll need for either an outright purchase or for a down payment so monthly payments don't exceed what the revenue will support. Assess what equipment will be required, then establish the timeline to amass the required cash to meet that plan.

As an example, let's say two tractors and two trailers will be required over the next three years. The cash needed as a down payment will be $20,000 for each tractor and $10,000 for each trailer for a total capital requirement of $60,000.

You also need to take into account the personnel required to bring these two tractor-trailer units online. What will the cost be  to hire and train these new employees?

Our example requires two Class 8 CDL drivers and a dispatcher. For the purpose of this article, we'll say it'll cost $9,000 to get these people hired, trained and on the payroll.

The final step is the time requirement. Once the equipment is acquired, licensed, and insured, and once the new employees are hired, trained, and on the payroll, how long will it take for the new trucks to produce enough revenue to meet each of their weekly break-even points (BEP)?

The typical length of time to produce a positive cash flow is about six weeks. There must be enough funds to pay the fixed costs of the new equipment (payments, insurance, licensing, etc.) for that  period. Let's estimate that for six weeks, the fixed cost is $4,400 per truck and trailer unit. Dispatcher wages and employment taxes come to $3,500; the wages for the two drivers and employment taxes total $10,500, or $5,250 each.  (See  box, Let's do the math)

In our example, the company wants to grow by two tractor-trailer units in three years. To make this possible, the company needs to integrate its capital requirements ($387,400) into its hauling rates over the next three years.

What’s the bookkeeping math to get you there?

Take the entire $387,400 and divide by three years, or 156 weeks, which equals $2,484 per week. Divide $2,484 by the number of trucks currently operating to determine the weekly capitalization amount of each truck for each week to reach the company's goal. If there are two trucks, the growth capitalization amount would be $1,242 per truck, per week.

Next, add the per-week, per-truck growth capitalization amount to each unit’s break-even point. In this example, we are going to use a break-even point of $3,850 per week, per truck. Adding that $3,850 and the growth capitalization total of $1,242 results in a total needed revenue of $5,092 per week, per truck.

When you capitalize your operation at the 156-week mark and your hauling rate is too high, this doesn't mean you scrap the plan. Just extend the period to reach your capitalization point to four years, five years or further until you reach the weekly revenue that your freight rates can match. This is also a great way to decide if your growth plan is truly feasible. Keep in mind many operations find it difficult to set growth funds aside while sustaining the carrier. This is why it's best to have your sustainability funds already set aside before moving forward with  additional trucks or trailers.

Of course, if you need to grow to meet the increased demands of a good customer, the same equations can be plugged into the spreadsheet to calculate what rates you should contract for in order to pay for any new equipment or personnel. Don’t be afraid to take those figures to your customer to negotiate that rate. Shippers understand business and will work to keep carriers that provide good service.

Growing a business to the next level involves some pain and sacrifice, especially with a smaller company that has fewer trucks over which to spread expansion costs. Unplanned or haphazard growth can kill a carrier of any size very quickly. Just because opportunity knocks doesn't mean it's the right time to grow; it's a signal to look at your growth plan and determine if the opportunity fits with the financial strength of your trucking operation.

The purpose of a strategic growth plan is to guide you through the process and let you know when the time is right.  

TAGS: News
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.