There are many provocative terms bantered about in the trucking media to suggest the sky is falling and that everyone needs to just weather the storm.
Those who have been through more than a couple of freight cycles know that, despite the doom and gloom, things can be done now to maintain and possibly improve profitability. However, none of the profit preservation methods are passive. Action must be taken now.
Internally, there are ways team members can use inflation as an advantage and better manage cash flow. Externally, there are things that can be done when interacting with customers and vendors, to illuminate the realities of cost structures and data-driven responses to blanket rate-reduction requests.
Be transparent: After spending many years observing the culture of high-performing trucking companies, some common traits emerge. One such trait is financial and operational transparency. Companies that skew toward opacity should consider this challenge: Conduct a quick, anonymous, one-question survey of all driving and non-driving associates. The question is, “Out of $1 of trucking revenue, how many cents are left after paying for all expenses?” If the sample size is reasonable (ie., 50+), responses will range from $0.01 to $0.65.
What can be gleaned from this? First, if a team member does not know how little profit opportunity there is to work with, it’s unlikely they will negotiate harder with a broker on backhaul freight, or call one more vendor to get an estimate for an on-road repair. Empower employees by educating them about the profit-challenged realities of trucking.
A cash flow statement is the priority: Let’s face it, the profit and loss statement (P&L) gets too much love. Profit is important and is the primary motive to engage in business. However, in the current economy, the P&L can hide too many transactions that are eating away at cash and increasing the need to borrow even more expensive working capital. Further, the cost of capital is changing rapidly, hitting many carriers with a double whammy.
If it’s not being done already, 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. Considering the ominous signs on the economic horizon, carriers should focus on their operating activities. If the sum of cash receipts does not cover all the current cash obligations with some buffer, it’s time for a deep dive into major cost categories. Some tough decisions may be in order.
Cash conversion cycle (CCC): Most companies actively monitor their accounts receivable and days sales outstanding, but many still do not 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 starts when a driver leaves a consignee location after delivering an assigned load. That’s when the clock starts ticking. The clock doesn’t stop ticking until a cheque is deposited or 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 between less than 24 hours to more than eight days. By dissecting the pinch points in the billing cycle, the overall CCC can be improved and cash flow can be dramatically affected.
Control future inflation: Not all cost inflation is the result of supply and demand. All cost categories can begin to rapidly inflate over time due to a lack of discipline. Increased revenue can hide many sins. The last two years have given businesses too much ‘cover’ to allow at least some operational disarray. Controllable inflation has crept in as a result.
Examples of controllable inflation are endless, but one common theme involves the gradual relaxation of hiring and training standards to fill empty trucks during the robust freight cycle. To course correct, carriers should revert to the hiring and training standards that were previously followed. If not, the long-term risk financing (insurance premium plus self-insured retention) will increase and could eat away at some or all of the prior profits gained.
Be transparent: Similar to transparency with team members, being candid with customers and vendors will yield positive outcomes regardless of the market. Having these discussions with shippers, however, may be easier said than done. Depending on the situation, it may not be possible to engage in any dialogue with current or prospective shippers. If there is an opening, take it; if not, make it.
A best practice is to continuously share the year-over-year (YoY) cost changes for major cost categories. Within our customer base, cost inflation has ranged from 17% to almost 38% YoY (Sept. 2022 YTD vs. Sept. 2021 YTD), not including fuel. It should be noted that the increase in fuel expenses has been muted by a proportional increase in fuel surcharges. However, carriers are paying for fuel today and getting paid for that fuel 60-180 days later, which poses liquidity challenges.
The majority of cost inflation relates to categories other than fuel. These include driver wages and benefits, maintenance, equipment, and insurance. Prior to and during bid events, it’s always a best practice to use data to set the stage for negotiations. Pre-emptively presenting the year-over-year cost category changes will build trust and elevate negotiating positions.
Be surgical with pricing and capacity: Understanding which lanes are profitable and which are profit-challenged allows for a better response to RFPs. (This article about FreightMath provides a useful guide to establishing a lane profitability framework.) It may be possible to reduce rates on a given lane by balancing areas in the existing network. This will improve overall profitability. Likewise, using FreightMath will help communicate why it may not be possible to reduce rates in other lanes.
Leverage brokerage: Carriers who can’t use their own assets to haul freight on a given lane should partner with carriers who have more capacity and other freight in those similar lanes.
Brokerage operations at asset-based carriers often rely too heavily on the overflow freight from the asset side of the business. In responding to RFPs, carriers with a reasonably developed carrier network should examine opportunities to utilize their brokerage to satisfy shipper needs while also generating margins that would have otherwise moved to another transportation provider.
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