The transportation industry is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively low gross and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: cash flow management, profit management, bad debt, financing and reporting.
1. Cash Flow Management
The transportation industry has historically been a very high-volume business with very low gross margin and profit margins. This results in very large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If the documentation supporting each shipment gets lost or delayed this can also delay collection. If a shipment gets damaged and there is a claim regarding the shipment, collection can be delayed. Transportation business owners need maintain aggressive accounts receivable collection processes to ensure clients receive invoices and supporting documentation quickly, clients acknowledge receipt of outstanding invoices with supporting documentation, and payments are received within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical, ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.
2. Profit Management
The transportation industry works on very low gross margins and bottom-line profit margins. As a result, it is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment such as trucks, ensuring they are being utilized 95%+ of the time, they are well maintained and utilize the most effective routes to deliver product from origin to destination. Maintaining the optimum number of trucks will also help to keep equipment license expense at a minimum. It also includes maintain good controls over indirect spending such as: people, insurance, rent, taxes. Maintaining highly productive employees is very important. Taking the time to hire they right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. This industry is challenged by a higher than average rate of turnover which can be costly, so taking the time to ensure you have solid employee performance management processes in place can really impact the bottom line.
Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss, with such things as driver education/training, asset tracking and control, solid business processes. Many businesses in this industry have significant rent expense for warehouses and land. Business owners need to ensure they are utilizing their building and land efficiently, that they do not have excessive unused building and land. This will help keep rent expense, property taxes, insurance and utility expenses at a minimum. Use of technology in the transportation industry is also very important. Businesses should be evaluating the latest technology that can be used to more efficiently and effectively transport product from origin to destination. This could be items such as: GPS technology on all trucks, load tracking/routing software, and enhanced computer technology that enables electronic transfer of information with customers and vendors.
3. Financing
The transportation industry is challenged is several areas. Many participants a small sole-proprietors that are thinly capitalized. Many of its assets (i.e. trucks) are constantly moving all over the United States. The industry has a higher than average occurrence of bad debt and theft. There is a high turnover in truck drivers. There is a high turnover in transportation businesses. All of these characteristics make it challenging for industry participants to obtain low cost working capital financing. In many cases, the financing used in this industry is factoring, factoring can be a useful financing solution in the right situation (i.e. a new rapidly growing business). However, it can be a very expensive solution when compared to tradition bank financing. For example, a traditional bank revolving line of credit may range from 5% – 7% APR while a factoring solution may range from 12% – 36% APR. This expensive financing can really take a bite out of business profits. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity and solvency ratios. Improving business efficiency, increasing bottom line profit strengthening the balance and driving growth will make your business more attractive to traditional lenders. It can also put the company in a good position to: weather any downturn in the economy, cyclicality in the market, or impact from changing fuel prices.
4. Bad Debt
The transportation industry is also characterized by many small sole proprietors such as truck drivers, owner operators and freight brokers. These sole proprietors can be very thinly capitalized. One or two loads that do not go as planned (i.e. damaged in shipment) can be devastating to these sole proprietors even sending them into bankruptcy or out of business. Transportation business owners need to recognize this risk and take measures to limit their exposure in this area. Some things that can be done to reduce this risk include regular credit checks on all vendors and customers, establishing tight credit limits on all vendors and customers, and aggressive collection efforts on all outstanding balances, no or limited advances to vendors. They can also consider taking security deposits from some customers who have a history of poor performance. Once the business owner has extended credit to one of these customers or vendors, they have put themselves into a challenging position. Collection and legal actions can be expensive and time consuming and even if you are successful in a getting a judgement, it still has to be collected. If the sole proprietor does not have the funds to pay or declares bankruptcy, the business owner is still not going to receive payment.
5. Reporting
Reporting and record keeping can be a challenge in the transportation industry. Especially with the large number of small owner operators and trucking companies. Many of these small owner operators and trucking companies don’t have the systems and processes in place to provide accurate, timely, electronic, information regarding their business or their shipments. This can present challenges for the transportation companies they do business with. IRS and state reporting can be delayed or inaccurate, these transportation companies can also run into problems with independent contractor reporting to the IRS.
Transportation companies that ship product across the US can also quickly find themselves subject to tax reporting in multiple states. It is critical that companies proactively manage their exposure in these areas by maintaining a good accounting system with a record of all sales by state and detailed information on customers and vendors including business name, address, tax ID and license information. These issues can be time consuming to address and result in significant fines and penalties to the transportation company.
Conclusion
The transportation industry is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively tight gross margin and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: cash flow management, profit management, bad debt, financing, reporting. Business owners that are able to effectively manage these challenges can really improve their bottom line!
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Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
