You don't have to live on bread and water to build reserves.
By Timothy Brady

You’ve heard it said that to be successful, you need a minimum of three months of operating cash in reserve. And as we all know this is much easier said than done, especially today with freight rates still far below where they need to be. But that doesn’t erase the fact you must have a cash reserve to stay afloat in difficult times and give you a cushion for the cyclic ups and downs of the trucking business.

One of the most difficult areas for most truckers and small carriers is the effect just one slow pay or no-pay account can have on their business. If you’re unable to pay for fuel, maintenance and repairs on your equipment, you’re out of business until the cash arrives that allows you to operate. And if you’re unable to service your customers, they’ll go to a competitor. So the objective is to have a three-month reserve of operating cash to cover lags in cash flow, slow pay accounts or unexpected repairs, maintenance or spikes in fuel cost that can put a financial strain on your business or shut you down.

Here’s a simple step-by-step process to reach your goal of three months’ operating costs set back to help you survive the hard times and thrive in the good times.

There is an investment strategy known as ‘Dollar Cost Averaging’ (DCA). The simple definition of DCA is you invest the exact same amount of money on the same day (every week or month) into your savings or investment account. The idea here is consistency. By having a fixed amount set aside on a pre-determined day every single week or month, it begins to multiply very quickly. Plan to set an affordable amount in reserve consistently until you’ve reached your three month goal.  

Keep in mind we’re just talking about your cost of operation and fuel for Operating Cash Reserve. It doesn’t include any of your fixed costs. Here’s how it would work for a single truck operator:

First, you must know your current monthly operating cost:

            If your current cost of operation is 15 cents per mile and fuel is currently costing you 50             cents per mile, and you traveled a total of 30,000 odometer miles in the past three   months, your three month operating cost is $19,500.  

($0.15 + $0.50)  X 30,000 = $19,500

Next, take your $19,500 three month operating cost and divide it by the number of weeks in which you would like to achieve your Operating Cash Reserve goal.

          This is the critical calculation, as it will determine the most affordable time to achieve your goal:

       52 weeks (one year) $19,500 ÷ 52 = $375 per week or $75 a day, five days a week.

      104 weeks (two years) $19,500 ÷ 104 = $187.50 per week or $37.50 a day.

      156 weeks (three years) $19,500 ÷ 156 = $125 per week or $25 per day.

      NOTE: I have purposely used a five-day week as typically, most trucks average five days of operation per week over a period of one year. It’s recommended that for every day you have a load on the truck, and for a minimum of 260 days a year, make your daily investment into your Operating Cash Reserve account.

Of course, the idea is to reach your reserve as quickly as possible financially. But it’s also important to be realistic and not place a strain on your already fragile cash flow. At a minimum, you should be able to achieve your goal in a three-year or 156-week period. If it’s not possible at the three-year level, you really need to reevaluate your entire operation and its revenue-producing capacity. (This would mean an analysis of everything from your hauling rate stature, to a line-item cost analysis, to the customers and lanes you are running.  But that’s another whole conversation.)

The process in accruing your Operating Cash Reserve is simple:

Determine the amount of cash required on a daily, weekly and monthly basis. I recommend on a daily basis, you either take the cash and seal it into an envelope, or write a check to your cash reserve savings account. Then on Friday of each week, deposit that money into the savings account. The smaller amount (your daily cash savings requirement) is a lot easier to part with than a larger amount. It’s also important to do it on the same day each week, using the Dollar Cost Averaging approach. And in no time at all, you’ll see your Operating Cash Reserve Account balance growing by leaps and bounds. One parallel result you’ll find is that you’ll sleep better at night.

Good loads and good roads, everyone.
Timothy Brady © 2010
www.timothybrady.com