In a capital-intensive industry like transportation and logistics, expenses are high and profit margins are tight: A healthy benchmark for businesses is to reach a net profit percentage in the 3-10% range (with anything above 7% considered exceptional).
Hitting those numbers is a step in the right direction. But it’s not enough. In order to monitor and improve performance, it’s essential to create accurate and consistent expense groupings for transportation and logistics companies.
Here’s what I recommend.
At around 83-86%, purchased transportation is by far the largest expense grouping for transportation and logistics companies. An equivalent to ‘Cost of Goods Sold,’ it includes any cost to move the truck, and should be divided into these three subgroups, at roughly the following percentages, based on line-haul revenue:
Driver, fuel and tractor (68-70%):
- Driver wages need to be considered as a whole, not just in terms of salary. Any taxes, benefits, workers’ compensation, etc., need to be included here. A common mistake is to group health insurance benefits for the entire company in one line, under administration. Instead, break out how much of that expense is related to driver wages so you understand the fully loaded cost of each driver.
- Fuel expenses include fuel, DEF (diesel exhaust fluid), and fuel tax
- Tractor includes the depreciation or lease costs, repairs and maintenance, tires, plates, taxes as well as tractor insurance.
This cost will vary, depending on trailer utilization, types of trailers and so forth. It includes anything relating to the trailer, such as depreciation or leases, tires, plates, repairs, maintenance, etc.
Insurance and claims (4-5%):
Best practice dictates that companies accrue for potential claims. A common mistake is to ignore this category until a claim hits. Instead, we recommend setting aside a monthly estimate so when something eventually happens that’s not covered by insurance, your company’s financials are much smoother.
The final, smallest subgroup is a catch-all. It could include occasional expenses like escorting.
This category should be around 11% total, and be broken into two subgroups:
Operations (7%): this includes anything to move freight to market: your wages for dispatch, any load boards, sales and marketing, travel to see customers.
Admin expenses (4%): It usually includes the wages and benefits of the billing department. (Note: If you have people running dual operations – staff that work in operations and admin – their wages need to be split between admin and operations for the most accurate picture.)
Other typical admin expenses include safety wages/benefits, recruiting, facility, office supplies, dues/subs, as well as meals and entertainment.
For companies with a line of credit or interest for equipment purchases, 1% is a reasonable amount to expect to spend on borrowing costs.
By isolating these groupings, you can monitor month-to-month, year-over-year, to find areas for improvement.
For example, if you see purchased transportation getting out of line, you might discover that repair costs are soaring and it means it’s time to look at managing them. It might mean that it’s time to start replacing equipment instead.
Isolating expense groupings for transportation and logistics companies also helps determine the real cost of taking a job: If you include health insurance for drivers in ‘admin’ rather than in purchased transportation, you might not realize you are accepting work at a loss because it costs more than you think it does.
Finally, the break-down allows you to compare company owned assets to owner operator fleets and your logistics division. Being able to look at those various classes, you can see which one’s doing better.
If your company isn’t hitting its numbers, try these expense groupings to see if you can pinpoint a problem area. But even if you are doing well, isolated expense groupings allow you to take a look under the hood and figure out where you can do better.
If you have any questions about improving your bottom line, learn more about our virtual CFO services for transportation and logistics companies or schedule a consultation below.All Insights