Trucking is a risky business. Those who know this better than anyone are the owners of micro-trucking companies. Equipment is expensive to acquire and maintain; revenue is elusive (here one day; gone to a cheaper hauler the next); and the liability risk is astronomical, with drivers constantly one vehicle away from a lawsuit eleven hours a day. Plus, anyone with a CDL and a few thousand dollars can be hauling freight in just a few weeks regardless of their knowledge of the business of trucking. So what separates the men from the boys and the women from the girls when it comes to succeeding in trucking?
Succeeding in trucking isn’t only what your credit rating is or what your company’s Dunn & Bradstreet Report looks like. It has to do with what you know, how much revenue your company produces against your costs, and what your accounts receivable look like. Also, the quality and diversity of your customers must be carefully managed in ratios of large to small size, time-critical or more flexible delivery dates, start-ups or ‘old reliables.’
Being successful is not robbing Peter to pay Paul, but having a plan when managing your assets, i.e., cash, equipment, property, those accounts receivable again, customers, employees and contractors. This plan must include being prepared for the lean times, equipment breakdowns and/or replacement, and covering the daily cost of operations while waiting for customers to pay. This strategy must not let growth out-pace capacity, and above all, there needs to be a vision of building the company’s net worth.
1. Know where your profit begins
The worst mistake owners of many smaller trucking companies make is allowing others to determine their hauling rates. Allowing your competition or your customers to tell you what you should be charging is the first step to business failure. Have you ever been asked by anyone at a truck repair shop what you’d like to pay to have your truck fixed? Don’t do the one thing that causes more failures in trucking than any other—letting someone else set your hauling rates. And the only way to set profitable rates is by knowing your break-even points.
2. Be willing to listen.
Top trucking company managers have an ear ‘to the road.’ They are always looking for new and innovative cost saving ideas. They thrive on the input of their drivers, dispatchers, safety and salespeople. If you’re wearing all of these hats, keep searching for other experts, the ‘been there, done that’ crowd, for information to help you become a leaner, tighter, more efficient hauling organization. Look for information outside the hauling side of the industry and stay on top of the trends and news from your shipper’s perspective.
3. Know your customers
Besides knowing what services are needed and wanted, you need to know the risk customers represent to your revenue-producing capacity. What’s their credit rating? How’s their paying history? What are their projections for growth? What are their weaknesses? Are there problems on the horizon for this company or their industry? Any labor troubles, foreign competition, recalls, product or patent lawsuits?
In other words, look for anything that could interrupt your customer’s ability to provide you with loads. The old saying “Don’t put all your eggs in one basket” applies here. A single customer shouldn’t represent any more than 25% of your total revenue or accounts receivable. Shipping customers are the vital core of your business, so it’s prudent to be continually finding new business. Constantly develop relationships with companies, brokers and individuals who can provide you with new hauling opportunities.
4. Give credit only where credit is due
Operations people tend to be quick on the issuing-credit trigger because their objective is to load the trucks and keep them rolling. Whenever you allow a shipper to pay on credit, you become a lender. If it is done with limits and controls, issuing credit can be an effective revenue enhancer. Done haphazardly, it can lead to a cash flow nightmare and you risk business failure.
People in the commercial lending industry look at what is called days sales outstanding (DSO). This is how many days from when a shipment was dispatched or delivered to when the hauling invoice is paid in full. If you receive final payment on a delivered shipment that exceeds 50 days from dispatch or 40 days from delivery, you have a problem.
The more accounts which fit this description, the bigger the crisis. You must be like a banker; if you’re going to issue credit, make sure your shippers and brokers have the ability to pay—and to pay in a timely manner.
5. Do you own a company or does the company own you?
A large majority of small trucking company owners, particularly single-truck owner-operators, earn less as company owners than they would as company drivers. The average owner-operator with his own authority today will either be driving as a lease driver or be in deep financial trouble within 14 months. The reason? Lack of investment in the company.
What these owners do is unknowingly take the cash from their trucking operation for their personal uses. They’ve failed to include all their costs in determining their break-even point, and hence into developing their hauling rates—or they don’t know their break-even point and are allowing others to determine their hauling rates.
Either way, these trucking company owners are taking out of their business much more cash than their operation’s performance and conditions will allow. This is a sure route to disaster.
6. Think like a banker
If you are going to establish a creditable relationship (pun intended) with a banker, you must approach your business from their point of view. Bankers don’t lend money without doing their homework. They’ll have articles from trucking industry publications and from banking resources like Journal of Commercial Lending or industry-specific studies from the Risk Management Association that will be in your file alongside your balance sheet, credit report, financial statement, profit & loss statement, and your business plan. You need to acquire the same information so you’re up to speed on what’s going on in your industry. Do your homework.
Knowing your break-even point will help determine your daily and weekly cash flow needs. Knowing your DSO and your customers’ credit worthiness will help you determine when to issue or withhold credit. Listening and researching how to improve your operation will increase efficiency, and investing in your company by leaving enough cash in the coffers will make the worst of times your best of times. Becoming bankable will help you to achieve self-capitalization—and self-capitalization is what leads to sustainable growth and success.