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Friday, August 3, 2012

Business of trucking: Basic training

Nice piece geared to owner-operators, courtesy of trucker.com Link to their site follows.  Picture, courtesy attorneybusinesscard.net
Business of trucking:  Basic training
--Tim Brady, Business Editor
In a football game, if a team is behind, a quality coach always returns to the basics and concentrates on executing fundamental techniques with precision, staying focused on reaching the goal line one yard at a time. In the world of trucking, it isn’t any different; when the going gets tough, it’s time to return to basics.
Tough could be that you just lost a major customer’s shipping contract; it could mean your costs are outpacing your income; or accounts receivables are much larger than the bank account balance. To get back on top of these or similar situations, you must focus on the basics of business, much the same as the coach will focus on the basics of the game.
Each  situation outlined above—service, efficiency, and expenses—can be resolved by focusing on a few basic business principles.
 Constantly farming and cultivating new business is a way to help deal with the loss of  a major shipper as a customer.  There are many variables that can suddenly change your company’s relationship with a customer. For example, the owner’s daughter marries someone in the trucking business; the company is sold to new owners; there is an extreme drop in business; or a multitude of other possibilities.
The way to guard against this is two-fold. Remember, don’t put all your eggs in one basket.  No single customer should represent more than 30% of the total revenue of your business. Second, always have other customers waiting in the wings to replace any loss of business. Track current shipping customers to see if there are other opportunities to haul additional loads.
You must constantly farm for new business, even when your carrier is running at capacity. Ever notice that teams with a deep bench packed with talented players to replace those injured or tired seem to win more games? There’s no difference when running a motor carrier; the deeper the customer bench, the more consistent the revenue will be.
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RISING COSTS
What if costs outpace revenue? This indicates one of three problems, or maybe even all three. One, costs have increased without an equal or greater increase in hauling rates. Two, the business environment has changed. There may have been a good load-to-truck ratio in the lanes in which your trucks operate, but now there are fewer loads than trucks, causing rates to fall. Three, costs are out of control and need to be reined in.
Again, we’re going back to the basics of business; you need to do a cost analysis to find out why there’s  a cash leak. It could be as simple as equipment that’s been idled due to lack of business. If that’s the case, the equipment either needs to be sold or its fixed costs need to be rolled into the cost of the entire operation and divided equally among other equipment that’s still producing revenue.
Not sure how to do a cost analysis? Start by answering the following questions:
  • What would happen if you reduced or eliminated an expense? 
  • How necessary is the item, service or person?
  • What would happen if the item, service or person were reduced in frequency of use? Or eliminated altogether? Would it lower or improve customer service?
  • How would it affect the overall efficiency of your drivers or your carrier?
  • Would something or someone else have to replace or fill the void left by reducing or eliminating this cost?
  • Would reducing or eliminating the expense cause other costs to increase or decrease? By how much?
  • What is the net result of increased costs or savings after you have completed the reduction or elimination?
By answering each question, you’ll have a much better picture of how well you’re in control of your costs and what items could be reduced or eliminated for a positive result.
The final situation outlined above is having your accounts receivable balance higher than the carrier’s bank balance. This is a cash flow problem, often directly traced to your carrier’s DSO (days sales outstanding). This is the average number of days that a company takes to collect revenue after a sale has been made. 
The lower a DSO the better, with the optimum being collecting at the time of delivery or at the time of loading. The longer the time it takes from dispatching a load to collecting for the service, the higher your carrier’s DSO.
A high DSO number shows that a carrier is selling its hauling service to customers on credit and taking too long to collect money owed. Any time DSO exceeds 31 or more days, the financial strain placed on the carrier builds. It’s not uncommon for a carrier’s sales to be excellent and at capacity, but because the DSO number is too high, the company doesn’t have the needed cash to operate.
There are only a few ways to deal with this dilemma, from least to most costly. Solution one is to collect what’s owed your carrier in a shorter time—COD, FOB or within five days of delivery. Solution two is to have a temporary source of cash either in reserve or in a revolving line of credit. The third is to have a factoring company purchase your high DSO accounts receivables at a discount.

SHIPPER SCREENING
The ‘last resort’ is to either sell or hire a bill collection agency. But if your carrier has reached this impasse, you need to look at the criteria under which you’re screening potential shippers. If your carrier is spending too much time chasing receivables, you’re sacrificing time needed to create new revenue sources or neglecting other critical duties, which can’t be good for your business.
Success in trucking is like any team that desires to be the winning team. The carrier owner who concentrates on mastering the basics of the business of trucking will be the winner.
Contact Tim Brady by email or call 731-749-8567. Join Brady in the Trucking Business Community at www.truckersu.com.


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