There are plenty of provocative terms being joked about in the trucking media to suggest that the sky is falling and everyone needs to weather the storm.
Those who have been through more than a couple of charging cycles know that despite the pessimism, things can now be done to maintain and possibly improve profitability. However, none of the profit conservation methods is passive. Action must be taken now.
Internally, there are ways team members can use inflation to their advantage and better manage cash flow. Externally, there are things that can be done when engaging with customers and vendors, to illuminate the realities of cost structures and data-driven responses to general rate reduction requests.
Be transparent: After spending many years observing the culture of high-performance trucking companies, some common traits emerge. One of those traits is financial and operational transparency. Companies leaning toward opacity should consider this challenge: conducting a quick, anonymous, one-question survey of all driving and non-driving associates. The question is: “Of $1 of trucking revenue, how many cents are left after all expenses are paid?” If the sample size is reasonable (ie, more than 50), responses will range from $0.01 to $0.65.
What can be taken from this? First, if a team member doesn’t know what a slim profit opportunity they have to work with, they’re unlikely to deal more with a freight forwarding broker or call one more vendor to get an estimate for a repair in the first place. highway. Empower employees by educating them about the profit-challenging realities of trucking.
A statement of cash flows is the priority: Let’s face it, the profit and loss (P&L) statement gets a lot of love. Profit is important and is the main reason for participating in business. However, in today’s economy, profit and loss can hide too many cash-guzzling transactions and increase the need to borrow even more expensive working capital. Also, the cost of capital is changing rapidly, hitting many traders with a double whammy.
If it hasn’t already been done, now is the time to start preparing a cash flow statement. This helps isolate operating, investing, and financing activities that contribute to and/or subtract from the cash position. Given the ominous signs on the economic horizon, carriers need to focus on their operational activities. If the sum of cash receipts doesn’t cover all current cash obligations with some margin of safety, it’s time to dig deeper into the major cost categories. Some tough decisions may be in order.
Cash Conversion Cycle (CCC): Most companies actively monitor their accounts receivable and days sold pending, but many still don’t effectively measure their cash conversion cycle (CCC). For companies that sell products from inventory, this is a key metric and process. However, because trucking companies are service providers, there tends to be less emphasis on this metric.
For carriers, the cash conversion cycle begins when a driver leaves the consignee’s location after delivering an assigned load. That’s when the clock starts ticking. The clock doesn’t stop ticking until a check is deposited or an automated clearing house (ACH) payment is received. One segment of the CCC that carriers control is the time between delivery and billing. This time interval can average anywhere from less than 24 hours to more than eight days. By dissecting critical points in the billing cycle, overall CCC can be improved and cash flow can be drastically affected.
Control future inflation: Not all cost inflation is the result of supply and demand. All cost categories can start to inflate rapidly over time due to a lack of discipline. Increased income can hide many sins. The last two years have given companies too much “cover” to allow for at least some operational mess. As a result, controllable inflation has been introduced.
Examples of controllable inflation are endless, but a common theme involves the gradual relaxation of hiring and training standards to fill empty trucks during the robust loading cycle. To course correct, carriers must return to the hiring and training standards that were previously followed. Otherwise, the long-term risk financing (insurance premium plus self-insured retainer) will increase and could eat up some or all of your previously earned earnings.
Be transparent: Just like transparency with team members, being honest with customers and vendors will drive positive results regardless of the market. However, having these conversations with carriers can be easier said than done. Depending on the situation, it may not be possible to engage in dialogue with current or potential shippers. If there is an opening, take it; if not, do it.
A best practice is to continually share year-over-year (YoY) cost changes for major cost categories. Within our customer base, cost inflation has ranged from 17% to nearly 38% year-over-year (Sep 2022 YTD vs. Sep 2021 YTD), excluding fuel. It should be noted that the increase in fuel expenses has been cushioned by a commensurate increase in fuel surcharges. However, carriers pay for fuel today and get paid for that fuel 60 to 180 days later, posing liquidity challenges.
Most of the cost inflation is related to categories other than fuel. These include driver wages and benefits, maintenance, equipment, and insurance. Before and during bidding events, it is always a good practice to use the data to set the stage for negotiations. Preemptive presentation of cost category changes from year to year will build confidence and elevate bargaining positions.
Get surgical with pricing and capacity: Understanding which lanes are profitable and which lanes are struggling to make a profit allows for better response to RFPs. (This article on LoadMath provides useful guidance in establishing a lane profitability framework). It may be possible to reduce the rates on a given lane by balancing areas on the existing network. This will improve overall profitability. In addition, the use of FreightMath will help communicate why rates cannot be reduced in other lanes.
Leverage Brokerage: Carriers that cannot use their own assets to move freight in a given lane should partner with carriers that have more capacity and other types of freight in those similar lanes.
Brokerage operations at asset-based carriers are often too reliant on overcharging the asset side of the business. When responding to requests for proposals, carriers with a reasonably developed carrier network should examine opportunities to use their brokerage to meet carrier needs while generating margins that would otherwise have been passed on to another transportation provider.