The 3 Things A Virtual CFO Wants to See for Your Business

“How can you tell if a transportation business is healthy?”

The answer is pretty simple. It takes a lot of moving parts to improve a transportation business, but right out of the gate, if I want to take a businesses’ pulse, there are only three things I need to determine.

1. Are Your financials in compliance with GAAP?

If you’re a transportation and logistics business whose financials look like a roller coaster, you’re in the majority. But it’s better to leave your highs and lows for the amusement park and do your financials according to Generally Accepted Accounting Principles (GAAP). 

This includes recording transactions properly, matching revenue with expenses, and recording prepaid assets properly. There also need to be monthly write-offs for bad-debt as well as insurance claims – even if you don’t incur one in a given month. 

If you follow GAAP, your financial performance should be pretty smooth each month, which gives you the ability to make a reliable forecast. It also means:

  • Banks will offer lower interest rates and higher lines of credit 
  • Buyers will pay top dollar 
  • Customers will be more confident 

If you don’t follow GAAP, your balance sheet will have spikes and dips, which will:

  • Lead banks to offer higher interest rates or smaller lines of credit 
  • Deflate your valuation on sale
  • Scare customers

When a business uses GAAP financials (prepared according to industry standards), it’s possible to benchmark them against competitors. The only way to know if your rates are high enough or your expenses are in check is through GAAP financials.

2. How’s Your liquidity?

Transportation is a capital-intensive industry. Expenses are large and money flows out the door day and night, for fuel and repair needs. No business can survive without cash, but transportation is the top example of this rule. 

When I look at a company’s books, I want to see: are they prepared for a downturn in the economy? How are their receivables? Are they planning their cash flow? Do they have an appropriate-sized line of credit that will get them through tight spots? Will a large expense wipe them out? Will a great opportunity pass them by?

When I see problems with liquidity, it often has to do with improper management of receivables. Often, a struggling business will cut their collection staff when really, they should be beefing it up – a good collection person will pay for themselves quickly.

Aside from that, timely billing, proper invoicing practices, confirming rates ahead of time – all these good habits add up to make an impact on liquidity: first, because it means more cash in the bank; second, because banks will look at receivables to determine the size of the line of credit.

 

3. Are your financials grouped correctly?

In an industry where profit margins are tight, you need to ensure your expenses are in line with industry averages, and the only way to do that is to group them correctly.  I recommend the following: 

Purchased Transportation (83-86%)

It includes any cost to move the truck, and should be divided into these three subgroups, at roughly the following percentages, based online-haul revenue:

Driver, fuel and tractor (68-70%)

  • Driver includes wages, taxes, benefits, workers’ compensation
  • Fuel expenses include fuel, DEF (diesel exhaust fluid), and fuel tax
  • Tractor includes depreciation or lease costs, repairs and maintenance, tires, plates, taxes, insurance.

Trailer (7%)

Insurance and claims (4-5%)

Other (1%)

Operating Expenses (11%)

Operations (7%): your wages for dispatch, load boards, sales and marketing, travel to see customers.

Admin expenses (4%): wages and benefits of the billing department. Other typical admin expenses include safety wages/benefits, recruiting, facility, office supplies, dues/subs, as well as meals and entertainment.

Cost of money (1%)

Cost of a line of credit or interest for equipment purchases

The only way to monitor and improve expenses is by isolating these groupings. It’s also the only way to determine the real cost of taking a job. Finally, it allows you to compare various divisions in your company: company-owned assets, owner operator fleets and logistics. Look at those various classes together and you can see which one’s doing better.

Signs of a Healthy Business

It’s rare to find a business that manages its own finances and is able to take care of all of these foundations on their own. And it’s pretty safe to say that it’s the reason why businesses grow to a certain point and then end up getting stuck.

Usually, getting these things in order is where I start when I take on a new client. Once you put in the up-front work to address these issues, then it becomes possible to dig in deeper and identify some quick wins and some long-term opportunities to work towards. Learn more about Virtual CFO Services today.

 

Keep Your Overhead Costs Under Control

Are you spending too much on overhead? Most businesses feel like the answer is, “Yes,” and the transportation industry is no exception. With slim profit margins, money being spent day and night, and payouts on claims and “if-not-when,” the best thing an owner can do for their businesses’ long-term health is to keep their overhead costs under control.

 

Step one: Know exactly what you’re spending where

With so many expenses – some of them prepaid, some of them belonging to multiple categories – it’s essential to follow industry best practices to know exactly where you line up compared to other businesses.

Purchased transportation and operating expenses are the two big groups of expenses, each of which get subdivided into several more categories; and then there is also cost of money, if you have a line of credit or a loan.

When you properly categorize and subdivide expenses, you can benchmark yourself against industry standards. For example, purchased transportation should be around 83-86%, with 38-40% going to driver wages/benefits – but you need to make sure that includes taxes, benefits, workers comp, in addition to salary. In order to understand the fully loaded cost of each driver, don’t include group health insurance benefits for the entire company in one line. Instead, break out which portion of the benefits are related to drivers versus administrative staff.

Another area where we see mistakes is in insurance and claims, which should account for around 4-5% of line-haul revenue. Don’t be tempted to ignore this category in months when there are no claims. There will be claims, so book something monthly and be ready when one comes in. This will lead to smoother financials, which creates confidence in your business. 

Step 2: Identify problem areas

Once you do your groupings, you can identify trends and troubleshoot accordingly – for example, if your repair costs are steadily increasing, that might be because of an aging fleet, so you might want to consider replacements.

You also can see where you’re way out of line with the industry, for example, if your pay structure or compensation plan isn’t set up properly.

Here are some common problem areas we see, when it comes to expenses:

Labor:

Do you have the right number of drivers for your company size? Are they efficient? If not, can they be better trained? Can you reduce turn-over? Are there ways to improve efficiency with technology and processes?

How is your pay structure? Are wages aligned with gross profit?

Fuel costs:

This is out of your control, but you can look at ways to save on fuel, such as reducing idle time.

Repair and maintenance:

Is your fleet age too high? Are your drivers staying on top of repairs and maintenance in a timely fashion so a small repair doesn’t become a big repair?

Equipment costs:

Are you getting the right discounts? Do you have a lot of claims on your equipment for damages?

Cost of money:

How much are you spending on your line of credit or equipment loans? We recommend 1%. If the number is too high, it might be because you don’t have favorable terms with your bank (which can happen if you don’t have clean financials) or because you are overborrowing. If it’s too low, you might be missing out on an opportunity.

Some of these issues are easier to fix than others; some take time. You can’t just change pay structure overnight, but you can start identifying and tracking the key metrics that impact your bottom line.

Step 3: Get your team involved

Once you know which areas you need to track, I recommend setting up a dashboard for frequent monitoring. Because of how fast this industry moves, some business owners like to do this hourly or daily – but weekly is generally a good rule of thumb.

If you don’t stay on top of things, problems snowball. The important thing is to be selective in what you choose to track and then do it every week, like we do with our clients. One of the things my clients always say they appreciate is having someone to hold them accountable, week after week.

It’s also helpful to involve different people in the organization. Shop managers should be managing the repairs and maintenance, logistics operations managers should be watching their labor versus gross profit.

Increasing revenue and profit margin starts with getting your expenses under control:

If any of these percentages get out of line, they’re going to drive down profitability in the long run. Temporary increases in expenses – for example, for a big hiring push – are to be expected, but you should always look for opportunities to improve. 

Request Your Virtual CFO Consultant Today!

4 Important Cash Accounts for T&L Businesses

Content Provided by: Dan Rutherford, Virtual CFO Summit Virtual CFO Services by Anders

A solid amount of cash on hand will help protect your business against unexpected disruptions, but don’t stop there. You need different cash accounts for different for different purposes, and we recommend keeping them in separate accounts so that you always know what you have:

  • Operating cash (for paying bills)
  • Cash reserves (cash-on-hand)
  • Tax reserves (for Uncle Sam)
  • Line of credit (for emergencies)

Here’s why you need each:

Operating Cash: Paying Bills on Time

For your Operating Cash account, you move money from where you receive revenue from Accounts Payable into your account for Operating Cash, no math required.

Your business will suffer if you’re not taking care of operating costs. But you need to pay for those costs from a separate account so you can understand them and any major swings.

Cash Reserves: How Much Cash on Hand Do You Need?

You can be generating significant profits and still go out of business if you’re burning through your cash blindly.

Rather than follow the common rule-of-thumb of keeping two months’ worth of expenses (since that number can change), keep 10% to 30% of your net income on hand.

You’re good to keep just 10% if your business has…

  • High recurring revenue
  • A strong pipeline
  • Zero or low Accounts Receivable (AR) days
  • A strong mixture of clients
  • No single client that accounts for more than 10% of your revenue

However, if the opposite is true (e.g., low recurring revenue, a single client accounting for much or your revenue, and high AR days), you need to try to reach the higher end. You won’t create your reserve overnight, but you want to start building up as soon as possible.

Tax Reserves: How Much Do I Need to Put Away for Uncle Sam?

Nobody enjoys paying taxes, but the last thing you want is to come up short during tax season.

A separate cash account for taxes can also help you avoid shocks to your business by writing huge checks (and added penalties).

Your tax reserve should be 40% of your company’s net income before taxes. You may pay less, but better safe than sorry.

Your estimated taxes are based on your previous years’ income statements, divided by 4. Even if your business is brand new with no previous income history, you still need to pay those estimated quarterly taxes to avoid potential penalties.

Line of Credit: Cash When You Need It Most

A line of credit can feel like a loan, and this can make some businesses nervous to open one. But really, you get the line of credit and hope you never need it. It’s just there for major emergencies – and major opportunities that come your way.

Your business should have lines of credit (LOCs) that cover 80% of your receivable balance. That 80% excludes your bad receivables.

To get a line of credit, you need clean accounts receivables. If your books are messy, you may need to hire a CPA to help you get your books in order. Banks will look to see:

  1. That you’re the amount you want in your LOC makes sense with how much income your business is earning
  1. That you’ll be able to pay off your LOC if you use it

For a sustainable business, keep good books.

With higher operating costs and slimmer margins, surviving in the transportation industry as a small business owner or owner-operator has never been more challenging. However, with a better approach to cash management, Brokers, Freight Forwarders and 3PLs give themselves a better shot at surviving the bumps in the road.

Why Key Performance Indicators Matter

Why Key Performance Indicators Matter

By Dan Rutherford, Virtual CFO and Transportation + Logistics Industry Expert for Summit Virtual CFO by Anders

Key performance indicators (KPIs) are vital for transportation & logistics companies.

KPIs such as revenue per truck, utilization, and revenue per mile provide valuable insights into the company’s performance. Accurate accounting is essential to ensure the reliability of these KPIs, which are critical when creating a financial forecast.

Make sure any CFO you’re working with has the necessary tools and expertise for accurate forecasting. Effective forecasting involves considering not just revenue but also cash flow and making informed decisions about equipment purchases, employment, and other factors that can impact your company’s financial position.

In addition to financial metrics, non-financial metrics play a significant role in assessing performance. Capacity planning, in particular, is critical for aligning a company’s goals with its operational capabilities. By focusing on improving culture, people, technology, and processes, companies can enhance utilization and effectiveness.

Measuring productivity and activity is equally important. 

I believe that productivity and activity go hand in hand, and, by increasing activity levels, productivity naturally improves. Metrics like gross profit per person are widely used on the logistics side of the industry to gauge productivity.

Make sure that you’re meeting regularly with your CFO. You should have an established cadence–meeting weekly to review cash flow. These proactive meetings not only address the current state of your cash flow but also anticipate any potential issues that may arise in the next 12 weeks. This approach ensures that your company is prepared for any challenges and can have peace of mind. If your CFO is reactive (reacting to a situation after it’s happened) rather than proactive (planning for a situation before it happens), you might want to consider a CFO with a more advisory approach.

Having someone on your team that understands the importance of having cash and tax reserves to prepare for unexpected events, such as economic changes or a pandemic, can be the difference in your business thriving or tanking. By discussing these scenarios ahead of time, you can create a plan and feel more secure about your financial future.

Once you understand the importance of forecasting, know your KPIs and non-financial metrics, you can leverage these factors to take your transportation and logistics company to the next level and unlock its full potential. The key to this, however, is having a CFO who understands the industry.

 

Navigating Tight Finances in 2024: Make-or-break strategies for small businesses.

By Dan Rutherford, Virtual CFO

Make-or-break strategies for small businesses.

It’s clear that 2024 is going to continue to be a challenging year for the trucking industry. With stimulus money running out and interest rates up, it’s no surprise that deactivations are also steadily on the rise.

In this environment, where it seems like so much is out of an owner’s control, the best approach is: Control what you can.

With all the moving parts for transportation and logistics companies, no one can blame an owner who is just trying to get through the week, cash-wise. Fuel costs, unexpected breakdowns, payroll – it’s a lot.

But if you’re going week-to-week, how can you look ahead to bigger decisions like hiring or major purchases and how to finance them? In leaner times, it becomes way too risky to just go with your gut.

Cash flow management might sound like a lot of number crunching, but it’s really just a way to take the information you already have about your company’s revenue and expenses and put it to work for you. By knowing your major monthly, quarterly and annual expenses and when you can expect client invoices to be paid, you take your gut out of the equation.

Cash Reserves

Part of cash flow management means building up enough cash reserves to weather any storms. We recommend anywhere from 10-30% of annualized gross revenue, depending on your size and level of risk.

That may sound like a huge number – and you don’t have to get there overnight – but there’s a reason why people love to say, “Cash is king.” If you’ve got a strong cash reserve and know what the next quarter and year will look like for your business, you’re going to be the one to make it through tough economic times. Having cash is a bit like driving a monster truck versus a scooter: the scooter might feel fun and carefree, until you get stuck behind a pile of boulders.

When you stay on top of your cash flow with weekly check-ins, you won’t be worried about coming up short for a payroll, and you won’t have to worry about getting hit by an unexpected expense. But it goes beyond that: You’ll be ready to grab those once-in-a-lifetime opportunities because you’ll already have the data to back up your decision.

As industry conditions tighten, the businesses that will survive and thrive will be the ones using data to understand and manage their cash flow.,

A solid financial model of your operational decisions is the secret to successful scaling. Our experienced CFOs create a dynamic forecast to help you analyze how those decisions impact your cash flow and financial statements. Are you ready to consult with our Virtual CFOs? Contact Dan Rutherford, Virtual CFO and Transportation + Logistics Industry Expert, for a free consultation

 

Get Where You Want to Go: Dynamic Forecasting for Trucking Companies

By Dan Rutherford, Virtual CFO

Would you send your drivers out on a cross country trip with a paper map? By now, GPS has become such a regular part of the industry that it’s hard to remember what things were like before.

Why is GPS such a powerful tool? Because it’s dynamic. It allows you and your drivers to know up-to-the-minute ETAs, to plan for detours and roadblocks, and to navigate around traffic. Take a wrong turn? You get back on track without wasting time.

GPS is a no-brainer. But when it comes to finances, too many companies are still using the equivalent of a paper map: the budget.

Every year, you sit down with your bookkeeper or maybe your tax planner, look over your expenses, and decide if and how to change things for next year. Then you hope for the best.

But what do you do about a spike in fuel prices? What if there’s an amazing opportunity to purchase a new vehicle – can you afford a loan? Do you have enough cash to buy it, flat out? What if a major client walks away, or a few drivers quit?

Unexpected things happen in business all the time. We know that for a fact. The question is, when the unexpected happens, are you using a paper map to try to get back on the road, or do you have a GPS?

A dynamic forecast is your GPS. We start by building it with the most important key performance indicators (KPIs) for your business, for example revenue per truck, utilization, and revenue per mile. We look at revenue, profitability and cash flow, both on a short- and long-term basis, and if things aren’t going in the right direction, we can test different scenarios to figure out the best way to course correct.

Dynamic forecasting isn’t just about damage control – although it helps to sleep at night knowing you’ve got that covered. It’s also about knowing if it’s time to jump on an opportunity or whether it makes more sense to wait this one out. Is it time to buy a new vehicle?

Before you commit all that cash, you want to know if you’ll have enough to make the next few payrolls – even if gas prices happen to surge this quarter. You’ll also want to know if you’re using your current fleet to its fullest.

There’s no crystal ball in business. But you can choose to run your business with a paper map or with a GPS. I’m pretty sure I can guess which one is going to get you further, faster – and with fewer surprises along the way.

 

 

TIA is the premier organization for third-party logistics professionals in North America and abroad. Membership at TIA adds value to your business and provides resources for growth.
Learn More

Alliances