Starting and running a trucking business comes with many unknowns and challenges. Developing effective trucking accounting processes is usually one of them. We tell our clients it’s important to get business finances in order early on, so they don’t spiral out of control. It happens faster than you might think!
To help you avoid potential trucking accounting pitfalls, we put together the top five issues we see new and early-stage trucking companies face in their company’s accounting practices.
1. Maintain Clean Financial Records with GAAP (Generally Accepted Accounting Principles)
When we review a transportation company’s financial statements, we usually see large fluctuations in monthly net income. While not abnormal, this is not the ideal situation. These fluctuations are especially noticeable in the transportation and logistics industry because of the nearly endless prepaid expenses trucking companies have such as insurance, fuel expenses, claims, etc. If one month of financials is showing substantial profitability, but the next is a notable loss, you need to dive into the root cause of these fluctuations.
Usually, the reason behind these significant losses and gains indicate lack of adherence to GAAP (Generally Accepted Accounting Principles). To solve the issue, ensure that revenue and expenses align each month using an accrual accounting method.
Not recording expenses in the right accounting period throws off your financials, making your profits and losses look way bigger or smaller than they really are. Over time, this kind of mismatch leads to serious issues, like filing the wrong taxes. Following GAAP isn’t just about clean recordkeeping and proper bookkeeping — it also sets trucking business owners up to benchmark against the competition, have better financial health when applying for loans, and make informed decisions overall.
2. Monitor Accounts Receivables and Accounts Payables Regularly
When your business is in its early stages, it is very easy for accounts payable and accounts receivable to spiral out of control. Making sure that processes are in place to monitor both is important for financial health. These processes should involve reviewing your accounts payables and receivables reports at least monthly to ensure no records are missing, receivables are accurate, and payables aren’t being paid at a slow rate. It’s essential to stay on top of your books.
3. Set Cash Handling Internal Controls
Internal controls are designed to decrease the odds of fraud being committed internally by staff members. While we’d like to trust our employees to always do the right thing, we can’t predict when or if good people (including our best staff) might make poor choices when under the many pressures of life.
While early-stage businesses may not have the capacity to put sophisticated internal controls in place, that doesn’t mean that basic controls can’t be implemented, especially controls that aid in handling cash. Basically, you want to prevent one single person from approving transactions, managing assets, or balancing the books. Having a secondary person review work or be a second transaction approver can safeguard business assets.
4. Create Separate Bank Accounts for Your Business Financial Needs
Most trucking companies do not have separate bank accounts for their business needs—tax payments, cash reserves, operations, and emergency credit. In fact, most transportation businesses operate on lines of credit at the beginning of their business journeys. However, setting up accounts early on and working to fund these accounts set your trucking business up for greater success. Having separate accounts for different business needs ensures money is available when it is needed for each particular use. You don’t want to be borrowing from your tax account to make payroll! Keeping things separate helps you avoid those “uh-oh” moments when a payment’s due and the money is not there.
Here are the four accounts we encourage small business owners in the trucking industry to have:
- Operating account – for day-to-day business expenses
- Cash reserve – your backup cash for unexpected obstacles or opportunities
- Tax reserve – cash saved for your quarterly tax payments
- Line of credit – a safety net for emergencies, like an industry or economic slowdown
5. Stay In the Know with Your Taxes
Taxes. What a scary word. While many startup owners would like to avoid tax filings and planning like the plague, it’s not an ideal habit to get into. You likely consulted with a tax advisor or attorney when first filing your business entity paperwork. One piece of the puzzle many transportation business owners miss is not setting up two independent entities—one should be the operating company and the other should be a leasing company that owns equipment. This protects your assets if your operating company is ever sued. If your business advisor did not set up dual entities for you at the onset of your business, it’s a good idea to have this done asap.
You also need to stay on top of tax planning. No one wants a surprise come tax time and owe the IRS a hefty bill. Working with a tax preparer or a CPA to find tax deductions can decrease your tax liabilities on tax returns, ultimately keeping more cash in your business.
If you are a transportation business struggling to set up proper financial management and business accounting strategies, feel free to sign up for a virtual CFO consultation below. You can also view more information about our VCFO services.
