Every company runs into cash flow problems at one time or another. However, many of these problems can be prevented with some planning and diligence.
In this article, we cover nine common cash flow problems that affect carriers, along with some solutions:
1. You don’t charge enough
Many trucking companies experience cash flow problems because they don’t charge enough per mile to cover their expenses. This often happens because the trucking company has not correctly calculated their per mile cost. Consequently, they end up underbidding for loads without even knowing it.
Solution: Determine a cost per mile that is sufficient to cover your expenses and expected profit. To do this, examine your current expenses and forecast the number of miles you plan to drive this year. Then divide the expenses and profit by the miles.
2. You are supporting the wrong industry
As a trucking company owner, you need to decide which industry you want to support and which lanes you want to work. Each industry and most lanes have different revenues and costs associated with them.
For example, hauling fluids has different requirements, costs, and revenues than hauling produce. Each supports different industries. The same can be said about hauling cattle, grains, and so on.
Your industry and lanes determine your “rate per mile” – how much you can charge shippers. This amount, combined with your costs per mile (see previous section), determines your profit.
Solution: Supporting the wrong industry is a difficult problem to fix. It means that your business model is broken. However, there are some things you can try to improve your finances. These include:
- Improving your costs
- Relying less on load boards
- Improving your revenue cycle
- Working different lanes
- Using IFTA to your advantage
3. Not working with shippers directly. Overusing load boards
One of the keys to success in the trucking industry is working with shippers directly. That is how you get trucking contracts with decent profit margins.
Unfortunately, many truckers rely heavily on load boards. Load boards are very competitive. Using them excessively can squeeze your profit margins to the point where pulling the load is not profitable. Load boards do have their place in most trucking businesses. Just don’t overuse them.
Solution: The best way to find reliable, high-paying freight loads is to focus on your sales efforts to get your own trucking contracts. This effort is time consuming, and often difficult, but is worth the time.
You approach will vary based on the industry you are supporting. For example, if you are looking for reefer loads, consider looking for shippers in the large produce markets. You can apply this strategy to any industry: go wherever your customers go and meet them.
Alternatively, call potential customers and set up appointments to speak to the shipping manager. Arrive well-dressed, be professional, and explain to them how you can reliably help them move freight. Eventually, your efforts will pay off.
4. Clients pay you slowly
Most shippers and freight brokers pay their invoices in 30 to 60 days. This delay creates cash flow problems for truckers because they can’t afford to wait that long for payment. They have expenses that must be paid promptly. Consequently, the company often runs low on funds and, at times, misses important payments.
Solution: A simple solution is to work with shippers and brokers that provide quick pays. Alternatively, you can finance your invoices using freight factoring. Factoring works by partnering with a finance company that finances your invoices from creditworthy shippers.
The factor provides you with an advance (similar to a quick pay) for your invoices. Then, they wait until the shippers pay on their due date. Factors charge a fee for the financing service based on the finance volume and time to pay.
Many factoring companies also provide fuel advances. These advances can be useful for carriers that are in a financial bind and need funds to buy diesel. To learn more, read “What is freight factoring? How does it work?”
5. Not using IFTA correctly
Many carriers and small trucking companies purchase fuel using the wrong strategy. Consequently, they spend too much on diesel, which shrinks their profits. Fuel purchases are governed by IFTA and are subject to “taxes due” or refunds. Buying fuel at a location that has the cheapest pump price (a common strategy) does not guarantee you the cheapest fuel.
Solution: Develop a strategy to help you optimize your fuel purchases. This effort requires some research regarding pump prices, taxes, and IFTA. Learn more by reading “How to calculate the cheapest diesel fuel prices“.
Note: Please check current IFTA regulations before making any changes to your fuel purchase strategy.
6. Growing too fast
For many carriers, growing too fast is a problem they’d love to have. Actually, growing too fast can spell disaster for your business. Unmanaged growth leads to missed deadlines, disappointed shippers, unhappy customers, and lost profits.
Solution: Successful growth requires careful planning and management. Your sales efforts can be backed by the operations and financial sides of the business.
Only sell services that you are sure you can deliver according to contract. It’s best to expand your trucking fleet slowly, but steadily. Ensure that back-office tasks run smoothly and are well managed. It’s the most effective way to grow your trucking company.
7. Expensive insurance
Insurance is one of the top three expenses for a trucking carrier. And you can’t go without it – otherwise you’d be operating illegally. However, for many carriers, the cost is becoming prohibitively expensive.
Solution: There is no easy way to solve this problem since your rate is determined by a number of variables. These variables include age of equipment, what you are hauling, location, company size, driver record, and so on. Work with a reputable agent that can help you find the most cost-effective solution for your situation. Additionally, screen your drivers carefully. One with a good record will cost much less than one with a spotty record.
8. Unexpected maintenance
Unexpected maintenance expenses are one of a trucker’s worst enemies. They come at the worst possible time and, invariably, they are very expensive. A breakdown can put your truck out of service until it is fixed. And if you are unable to pay for the repairs, the truck will be down and out of service indefinitely.
Solution: Doing preventative maintenance on a schedule reduces the chances of having a breakdown. However, preventative maintenance will get you only so far. You still need to be prepared for unexpected breakdown expenses. They happen to everyone.
The only way to handle unexpected repair expenses is to have an emergency cash reserve. A well-sized cash reserve ensures that you can pay for repairs quickly, so your truck can get back on the road and pull loads. We cover cash reserves in the next section.
9. No cash reserve
Every business should have an emergency cash reserve to get them through cash flow crunches. If your trucking carrier doesn’t have a cash reserve, you will be at the mercy of circumstances. A broken truck, a string of late payments, or some other unforeseen circumstance could send the business into a tailspin.
Solution: The solution is simple, but it requires discipline to implement. Build a cash reserve by saving a small portion of your profits every month. Divert those funds to a special bank account and don’t touch them unless there is an emergency. Consider using factoring (explained in item #4) until your reserve is built. This approach ensures that your cash flow is not impacted by slow payments.
Build a cash reserve that is large enough to make you comfortable. Some experts recommend saving up to three months’ worth of expenses. Other experts insist on six months. Ultimately, it’s your choice. If you are unsure, consider working with your CPA. They will help you determine the right amount.
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