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. 

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Why the Transportation and Logistics Industries Need a Virtual CFO More Than Ever

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

[email protected]

 

I got into transportation and logistics 20-plus years ago when a family friend reached out to me. (I had just wrapped up more than a decade with the IRS, so I wasn’t used to getting invited out to lunch all that often.) His business was growing, and he was feeling anxious that he had a lot of questions and not all the answers. He thought he needed a little more firepower in the accounting room, so he started to pick my brain.

Transportation and logistics became my niche. I’ve worked with companies that are more heavily into the transportation side (the company owns the asset) and companies that are more heavily into the logistics side (non-asset base, brokerage operation). I’ve also run a $127- million logistics division of a large company, so I’ve seen the industry from multiple perspectives.

It’s a complicated accounting model. There are a lot of moving parts, literally. You’ve got fuel, driver wages, got repairs on the road. It can be an accounting nightmare, with all the operations people that need access to cash (unless you want a call in the middle of the night because someone’s truck broke down). You have to relinquish some control – and control what you can.

But it’s also really rewarding. A lot of companies will just be looking at their cash one week out. They want to get through the week, but at the same time they have big growth goals and no real plan to get there. It’s like saying you want to get to California, getting in your car and heading west. You might get there, but you have no idea when.

A Virtual CFO can give clients a roadmap, a plan for where they’ll be tomorrow and the next day. Once you help clients set up their KPIs and understand their cash flow, they don’t have to guess anymore. There are no surprises. And there’s a lot of potential upside if they stay ready to capitalize on possible opportunities.

A lot of the Virtual CFO job–about 80%–is the same for any industry. At Summit, we focus on business fundamentals that are valid across the board. But about 20% is industry specific, and you learn that not just by reading up on it, but by working closely with companies and learning their vernacular. (Talking to other people who have worked in the industry doesn’t hurt either.)

Here’s what you need to know about offering Virtual CFO services to clients in transportation and logistics.

The transportation and logistics industry is a perfect match for fractional CFO services. It’s a capital intensive industry with a lot of moving parts to keep track of, if you want to be able to take advantage of the current surge in demand.

It’s also made up of small- to medium-sized operations that need financial services but can’t support a full time CFO. As of March 2023, 91.5% of trucking carriers operate six trucks or fewer. With a tractor costing upwards of $150,000 and trailer $35,000+, even those smaller companies will have a lot of capital on the line.

Making capital acquisitions decisions is harrowing for a business owner. A mom and pop operation will want a sounding board before they move forward. They often feel like they need direction – or even if they know what they need to do, they need someone to echo it back to them and show them in writing, “Here’s what this looks like.”

They also look to a VCFO for industry information outside their bubble. They only know what they know. They’re talking to the same people every day. But if you specialize in the industry, you’re bringing them that extra value of knowing the standards, the trends, the averages. Then,  when they need a solution to a problem, you can listen and say, “This is how I’ve seen it solved before.”

Forecasting changes the game

We’ve all seen the rollercoaster of fuel prices this past year. For most of us, it’s an annoyance when the pump drains our wallet a little faster than the last time. For the transportation industry, not staying on top of monitoring fuel from a cost and pricing standpoint could mean closing their doors.

We’ve also seen bigger ripples hit the industry: In March 2020, I saw companies whose business dropped by two thirds or more, only to rebound in July to record highs that are still climbing. For transportation and logistics companies, it’s not just about white-knuckling it through the scary times. It’s about being poised to take advantage of opportunity.

That’s where forecasting becomes invaluable. A lot of transportation and logistics companies are looking to next week, but if you want to answer questions like, “Does it make sense to purchase new equipment? Should I bring on new employees or can I get more productivity out of my existing workforce?” you need to look out one to two years.

If you’ve ever had a “dreamer” client, forecasting will be a game-changer. You know what I mean, the guy with his foot on the pedal who wants to grow X percent this year. With a forecast you sit down and say, “We don’t have the capacity to do that right now. We don’t have the people. But let’s figure out a plan to get to that capacity, and put some numbers behind it.”

Now they’ve got visibility into the future. That’s what gives the business owner value. You worry you’re going to out-run revenue, or you don’t know if an extra day of vacation is going to impact the bottomline. That’s when diving into the non-financial numbers is so important: The client starts to realize that the impact of a small decision can be huge.

Follow KPIs daily

If a company knows their KPIs, there will be no surprises when it comes to their financials. It may sound boring but it actually can turn into something really useful. In one company I worked with, we set up a dashboard that refreshed every hour. People loved watching it to see how they were doing. We set up friendly competitions, not to criticize people, but to encourage them. It was fun for them to see the gross profit for the month, compared to their individual activity and performance.

Owners who are willing to pay attention can figure out their KPIs just by walking around their yard and seeing how many empty trucks they have. That’s a good indicator right off the bat. In transportation, they’ll want to know things like average revenue per truck, average revenue per driver, revenue per mile and number of unseated trucks – per day, per week and per month. average revenue per driver. On the logistic side,  you’re monitoring performance per employee, gross profit per employee per day, per week, per month, and how many shipments they move.

But you also need to help them monitor to make sure it’s not garbage in, garbage out, and that they’re measuring the right things. I’ve seen people make the mistake of thinking their revenue per truck was a certain amount, but if it’s loaded with stuff, it shouldn’t be in an actual revenue number.

Look to losses to gauge risk levels

Sometimes you have to move a shipment and you lose money. In transportation, there are certain projects that are more profitable than others. If you move 50 loads a week for a client, you might lose on two or three of them.

Monitor the number of shipments that an employee handles, regardless of profit. Monitor the losses. It might seem counterintuitive, but if you’re not losing sometimes, it means you’re not taking enough gambles and you’re probably getting too conservative.

If you keep an eye on all those statistics, over the month your client should have some key insight to how they’re doing and if they’re profitable.

Meet weekly to eliminate surprises

If your clients have been working with a traditional bookkeeper or tax expert, they may not understand why you want to see them regularly. But once you set the cadence, and they see how well it lets them sleep, they’ll start to look forward to it.

I like to do a weekly cash flow meeting. It’s all of ten minutes, and it covers current cash but also the next twelve weeks. It takes the worry off their plate, lets them focus on running the business rather than worrying they’ll get caught without cash for payroll.

I also do weekly forecasting meetings as well as pipeline meetings, to see what they’ve got coming through. Then we do financial meetings, reviewing the KPIs and seeing how they did and why, whether it’s due to an industry-wide trend or something specific to them.

It’s fun to stay on track with the client. I set those meetings months in advance, so it makes it easy to stick to. It’s how I ensure they know the roadmap and have everything they need to execute our plan.

The weekly meetings also give us plenty of time to be strategic, rather than reactive. If things take an ugly turn – as they did at the start of the pandemic – we can build three different models to see what it looks like if things are better or worse than expected. If you do it for them on paper, before jumping in, they never are forced to just wing it.

“When is it time for a new line of credit?” “What happens if a recession hits?” “How long will it take me to double my revenue?” With Virtual CFO services, they’ll be ready to answer these questions.

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