To correctly manage your cash flow, you must constantly monitor your Break-even Point. This is especially important in these unpredictable economic times when fuel price fluctuations are driving thousands of trucking companies out of business...

By Timothy Brady

Last week we covered one through three of the important components of a small motor carrier’s cash flow. In review they are: 

One:    Know Your Days Sales Outstanding (DSO) Figure

Two:   When and When Not to Issue Credit to a Customer

Three: Manage Your Credit—Know Your Credit Score

This week we’ll continue with the next four important components of managing cash flow for a small motor carrier.

Four: Diversity is the secret to positive cash flow:

“Don’t put all your eggs in one basket,” applies here. A single customer shouldn’t represent more than 20 to 25% of your total revenue or accounts receivable. Shipping customers are the core of your business, so focus on continually farming for new business. Constantly develop relationships with companies and individuals who provide you with new hauling opportunities. Growing your business is your objective. Creating diversity in your customers is critical to ensuring a positive cash flow. It’s much easier to replace 20 to 25% of your revenue needs than larger percentages. When you have over 50% dependency on a single customer, if he disappears, it can wipe you out.

Five: Staying on top of that ever-changing Break-even Point:

To correctly manage your cash flow, you must constantly monitor your Break-even Point. This is especially important in these unpredictable economic times when fuel price fluctuations are driving thousands of trucking companies out of business. Calculate the changes in your break-even point on a week-by-week if not load-by-load basis. Knowing your break-even point on each piece of equipment is critical to keep your profit bull’s-eye in sight for each load your company hauls.

Six: Having a strategic plan to deal with inevitable periods when cash is short but bills and expenses need to be covered:

In your strategic plan, you must have an accounts receivable management company in place. Every start-up company and any company attempting to grow will experience a cash flow deficit. You need an organization which becomes your backbone. Do not wait until you are in dire straits to locate a commercial lender or a factoring company. Set up the backbone before needing this type of service. Find an accounts receivable collection company that will assist in building a cash reserve for the future, give you quick access to cash, and provide a means to become self-capitalized.

Seven: Have a growth plan in place which anticipates expansion so you have the required operating cash on hand while your revenues catch up:

A large majority of small trucking company owners lack investment in their own company. These owners unknowingly steal the cash from their trucking operation for their personal uses. They’ve failed to include all their costs in determining their break-even point 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 more cash than their operation’s performance allows. As you develop your growth plan, reinvest your profits back into your company. If you are currently living off the profits of your trucking company and not paying yourself a specific salary figured into your fixed costs, you are stealing the money which will help you grow. Set a salary for yourself as a fixed expense, take your profits and start building your growth account. A successful business typically won’t share profits with its owners for three to five years or more. But an owner who hasn’t calculated a salary into his break-even point most likely won’t be in business at the end of five years.

Keep in mind, every start-up trucking company and any carrier attempting to grow will experience a cash flow deficit. In your cash flow management and your day-to-day strategic plans, you must have an alternative on hand. This could be that previously-mentioned factoring company  working with you so you have the necessary cash available to run your operation and not be at a standstill, waiting for your customers to pay you.

You work hard for your money; be sure you work with someone who has your best interests in mind, and who will work with you every day to achieve your financial goals.

A word of caution: Select your factoring company carefully. There are some which have one goal: get as much money as possible out of your pocket within fourteen months (the average length of time most start-up trucking companies last). Many of these companies will legally tie you up so there is no escape until you’ve failed, so read and thoroughly understand your contract. Be sure you’re aware of your obligations, when and how you can cancel your agreement, and what it will cost you. You need an organization which becomes your backbone, not one that will break your financial back.

Cash flow—the lifeblood of any business, and the road to success.

Good loads and good roads, everyone.

Timothy Brady  © 2010

www.timothybrady.com