Chapter 8 -
Improving profitability and reducing waste

The ultimate cure of cash flow problems is a well-executed business plan, including adequate owner capitalization, stringent cost control, consistently profitable operations and a steady growth plan with the right types of customers.
What are the key practices of the most profitable companies and efficient managers of cash flow?

Drafting a sound business plan
For cash to flow smoothly, your business must run smoothly. The first step is a sound business plan. Running a business is hardly ever smooth, but you can take steps to minimize the ups and downs. By spending the time up front writing a business plan, you will reduce the time it takes to make decisions about the operation of your business.

Many cash flow problems are born of ill-conceived expansions and management attention diverted from core customers, routes or competencies. A business plan that reflects the input of all your key managers and advisors leads you in the right direction.
Another part of your business plan will reveal your pricing strategy. For example, your plan might read: “CCU Trucking Co. will provide the highest-quality service by carefully selecting customers. We will differentiate our company by going above and beyond the normal service expectations. As a result of this service, we will charge our customers a fair premium to receive premium service.”

In this case, your success clearly depends on obtaining higher freight rates – and delivering the extra customer service required to get them.

Having a business plan is like having a meticulous preventive-maintenance program. It may seem expensive and time-consuming, and you probably could get by for a while without it. But eventually a major business breakdown will show the cost of failing to draft a sound plan.

For more on drafting a business plan, consult How to Write a Business Plan, part of the Commercial Carrier University series.

Reinvesting in the business
Many cash-poor trucking companies suffer because the owners either take too much cash out of the business too soon or fail to inject enough equity into the business in the first place.

Every business owner has the right to take cash out of the business to fund personal endeavors. Doing so prematurely or in excess, however, may suck the very lifeblood out of the business. As a rule of thumb, if the owner’s total salary, benefits, withdrawals, loans and removal of profits exceed 6 to 10 percent of revenue, he may be starving his company.

Without proper capitalization, you can count on cash shortfalls. Capitalization refers to the amount of money put into the company by owners, minus any outstanding debt. On the balance sheet, capitalization appears as the owner’s equity section.

Owner’s equity may come in various forms, including cash from a personal bank account. Usually, however, capital comes in two forms: repayment of debt and retained, or reinvested, earnings. When your trucking company repays principal on outstanding debt with cash generated in profitable operations, it is actually increasing capitalization. Assets purchased from the debt are considered capital and are still in the company.

Repaying debt can bring pitfalls, how-ever. First, if you are repaying debt with the proceeds of other debt, you are not creating capital. Making bank notes by stretching out payroll tax deposits is not reinvestment; it’s robbing Peter to pay Paul.

Second, an overly aggressive plan to avoid or repay debt can make your working capital suffer, thereby creating the very cash flow problems you’re trying to avoid. You must have a careful strategy to manage the repayment of debt so that it doesn’t endanger your cash flow. See Chapter 13 for ideas on properly using debt to avoid a cash flow pinch.

The most common source of capital is retained earnings, which represent your company’s net profit earned but not distributed to owners. Retained earnings are not always in cash, however. You may have spent some of your excess cash throughout the year making down payments on new tractors or other capital items. The important thing is to keep money in your company to give it the oxygen it needs to live.

Table 8-1 displays benchmarks for your trucking company based on the size of your sales. Equity is stated as a percentage of total assets of 1,159 trucking companies with an SIC Code of 4213 and 572 trucking companies with an SIC Code of 4212. SIC Code 4213 represents long-haul and regional trucking companies; SIC Code 4212 represents local trucking companies, except for those that provide storage.

Compare the percentages from the table with the numbers in your own balance sheet. These benchmarks are from the RMA Annual Statement Studies, and they represent the average for each category. Are you beating the average?

Identifying problem customers
Would you believe that your largest customers might be hurting your business? Just because a shipper represents a large volume doesn’t mean it’s a healthy customer for your company.
Try this easy analysis:

1. Order your accounts receivable list – from the greatest amount to the least.
2. . Calculate the total dollar amount.
3. Multiply the total dollar amount by 0.8 (or 80 percent).
4. Once you determine the dollar amount that represents 80 percent of your accounts receivable, add the companies’ totals on your accounts receivable list one by one until you reach that amount.
5. Finally, determine the percentage of your total number of companies that this figure represents.

In Table 8-2, the 10 shippers together represent $124,500, but the top two shippers together account for $99,600, or 80 percent. These are the major customers and, by virtue of their business volume, have the greatest impact – positive or negative – on our sample trucking company.

Now calculate the average collection period for each of your major customers. Most good receivables software will show you the age of each invoice outstanding, and a total average for the customer. Your cash shortage could be due to only a few shippers taking liberties with your payment schedule. If a company is habitually late, chances are that it could be your most difficult-to-please shipper. In this case, you should consider a heart-to-heart talk and renegotiation of your partnership or – if the shipper is extremely slow-paying – even refusing to serve it in the future. That’s a drastic step, of course, but you can’t let a single customer wreck your cash flow – and it could.

Diversification of customer base often is the tough lesson learned by companies that come back from near-disaster. Consider your risk exposure to these big customers if any one comprises more than 20 percent of your revenues. Your company could be at serious bankruptcy risk if one of these companies has financial problems of its own.

Don’t assume that a high-revenue customer is among your best customers. If it presents an accounts receivable problem for your company, it could be the one hurting your business. Your best customers may not even show up on your aged accounts receivable list with large balances.

Once you have performed this analysis, set an action plan to either rehabilitate your slow-paying customers or eliminate them. The best way to accomplish this action plan is to create a “desired customer characteristic list,” discussed below.

Prioritizing customers
Have you ever turned away a customer you had the capacity to serve? Unless the company had bad credit, probably not; it’s tough to turn down business.

Taking any business you can get, however, could hurt your trucking company. Try developing a checklist of desired customer characteristics to screen customers. The only good customer is the one that pays, matches your company’s strengths and can be pleased with your service. How do you know if your customers fit your qualifications?

Your best customers should be those that contribute a reasonable volume of business and pay on time. In addition, you should enjoy working with this customer. Classify this type of customer as an “A” customer.

Judge your other customers and label them B, C, or D. Work on the Bs and Cs and fire the Ds. The D’s cost you money, because they occupy your time and energy, keeping you from serving your As or upgrading your Bs and Cs.

Once you understand these three criteria – paying customers, reasonable volume and enjoyable relationships – develop a more objective profile of characteristics for customers you would like to serve and those you want to avoid. Will you, for example, serve companies that have been in business only two years or a company that has been in bankruptcy? Consider distributing this list internally to anyone in a position to accept new business.

Monitoring profit margins
To grow your company you need additional sales, right? Yes and no. True, more sales will increase the top line, but they won’t always increase the bottom line. Gradually improving your profit margins – especially your operating margin – is one of the best ways to increase your cash flow.

To increase your margins, however, you must operate your company extremely efficiently. And you must invest the time and effort needed to know where you are profitable and where you aren’t. Here is where prudent management pays off in cash flow. Improve your margins and watch how your cash flow helps itself.

Table 8-3 shows overall profitability benchmarks for your trucking company based on sales volume. Margins are expressed as a percentage of total sales of 1,159 trucking companies with an SIC Code of 4213 and 572 trucking companies with an SIC Code of 4212. As stated above, SIC Code 4213 represents long-haul and regional trucking companies; SIC Code 4212 represents local trucking companies, except those that don’t provide storage.

Compare the margins from the chart with your own numbers from your income statement. These benchmarks are from the RMA Annual Statement Studies, and they represent the average for each category.

Common measures of cost efficiency include the operating ratio and cents per mile. The operating ratio is the inverse of the operating profit margin. For example, if you have an operating profit of 4.5 percent, then your operating ratio is 95.5. Many software programs allow you to show your P&L items as cents per loaded mile or cents per mile driven. To control costs, you must regularly review these indicators and quickly take action to improve deteriorating numbers. After you have reviewed your margins, you will know where you stand compared to other trucking companies. Setting a business plan to achieve these average margins or better is the ultimate long-range cure for cash flow troubles.

Monitoring overall progress
Once you establish a business plan, you need a structured monitoring schedule. None of the ways to improve cash flow and profitability is effective without implementation. If you have several managers, establish regular monthly and annual management meetings to evaluate the past period’s performance and plan for the next period.

You have created the map to success – your business plan. You have ensured that your company has sufficient capital and is attracting and retaining the best customers. You have compared your company to others. Now it’s time to move forward, to set some targets and to ensure that they are met. And you must regularly monitor implementation of those targets and steps.

Monthly meetings are the perfect opportunity to accomplish this monitoring activity. Make a regular agenda, systematically address all your targets and evaluate whether you are achieving your desired goals. Discuss strategies to either improve your performance or keep doing what’s working. Most important, don’t be afraid to include your best internal and external advisors in this process. Your key managers and accountant can help you keep your company between the lines and on the road to success.

In Summary
Holding on to your money longer is a great cash management tool, provided that you balance timing with getting the best price and other terms. It’s crucial, however, not to extend grace periods to the point of affecting your credit rating. Your good name and reputation are
paramount.