As a transportation and logistics business owner, you know that you need to be tracking financial metrics to improve the profitability of your company. However, identifying the correct metrics to track can feel like an impossible mission. Even after you’ve chosen the right metrics, you have to learn what to do with the information you uncover.
I’ve gathered the most important metrics I believe a logistics company should be tracking, leaning on years of experience working with transportation and logistics clients. I’ve also included insights that can be gathered from these metrics and how to put these insights into action through financial best practices.
Transportation KPIs for Business Profitability
While there are nearly endless transportation KPIs you could be tracking to improve company performance, I’ve highlighted the most important ones. Why is it important to continually track these KPIs? Monitoring progress towards a goal KPI benchmark allows you to determine where improvements could be made. If a metric takes a nosedive, you can analyze procedures and processes to find out what changed to make such a negative impact. Vice versa, if you make a large leap towards the goal, you want to be sure you know what operational shift is paving the way.
Cash Position and Liquidity
Cash is king and essential for any business to survive. That’s why keeping an eye on cash position and liquidity metrics is so important. Quite frankly, without cash, a business can’t exist. You need to be asking yourself how liquid your company is and whether your business is prepared for potential economic downswings and other obstacles that are coming your way. On the flipside, it’s also important to ask whether cash is available to take on business opportunities that may arise in the future, such as a dream hire, buying equipment that improves efficiency, etc.
A great way to check the capacity to which your business can take on challenges or opportunities is through forecasting and scenario planning. A forecast gives you a short-term and long-term look into your cash position. Once you have a solid, real-time forecast, you can plug in new data to determine what happens if a specific scenario presents itself. Forecasts enable business owners with the power to make data-driven decisions by understanding their cash position in-depth.
Along with having these metrics at your disposal, setting up cash best practices can ensure peace of mind and allow a transportation business to focus on operations. Having a cash reserve equal to 10-30% of annualized revenue is what enables you to jump on opportunities when they come your way as previously mentioned.
In addition to a cash reserve, you want to apply for a business line of credit equal to that of your cash reserve and decrease accounts receivables days through appropriate invoicing procedures, allowing your executive team to work ON the business rather than IN the business.
I’ll break down these best practices in further detail later on.
Return on Assets (ROA)
Arguably, one of the most overlooked logistics KPIs is return on assets (also known as ROA). Return on assets serves as a great macro level KPI to track overall company performance by measuring how profitable a business is in comparison to total business assets. Transportation is a very capital-intensive industry, and tracking ROA helps your team determine whether assets are being managed well by comparing to a goal benchmark.
Gross Profit Margin
Tracking your gross profit margin provides intel into profitability, cost efficiency, and overall financial health. Tapping into this metric uncovers where transportation costs and expenses can be optimized and what business procedures could be negatively impacting financial health.
The first step to revealing potential expense optimizations is through proper expense groupings. Expenses should be appropriately grouped into three buckets—operations expenses, admin expenses, and cost of goods sold (COGS). When expenses are categorized properly, you can use this information to compare against industry standards. Transportation owners run on thin profit margins and knowing when one of your expense categories are off helps fix a problem before it substantially impacts profits.
The expense category that has the most impact on your profit margins is COGS. After all, gross profit is calculated by subtracting COGS from revenue.
One of the major expenses factored into COGS is labor. When labor costs rise above industry standards or compensation is disproportional to the gross profit margin, you should consider this a blaring sign that it’s time for a labor cost review.
Labor costs are not always a matter of over-hiring. Disproportionate costs can be tied to inefficient employees, low retention rates, flawed pay structures, and unproductive processes. Speaking to department managers and team leaders unveils where these issues may be taking place, and you can work with them to solve problems at the source.
Financial Best Practices
Accurate Recording and GAAP
The first step when addressing financial best practices is to check for compliance with GAAP. Many mid-sized transportation companies struggle with recording financials accurately, yet without solid recording utilizing General Accepted Accounting Principles (GAAP), you won’t gain insights to further business initiatives.
Here are a few questions to ask yourself to ensure your company is following accounting principles and keeping clean data:
- Are transactions properly recorded?
- Are expenses being matched up with revenue?
- Are large fluctuations in financial performance occurring from month-to-month due to poor transaction recording?
Setting Benchmarks
When defining goal benchmarks for your transportation and logistics business, you can look to industry standards as a baseline. The ATRI, American Truckers Research Institute, has a great pulse on industry benchmarks. If your financial metrics and KPIs don’t come close to these baselines, it may be appropriate to set your first financial goal to reaching these industry standards. Then, you can work beyond these baselines to improve beyond industry competitors if feasible.
It’s normal to see metric fluctuations from month to month, but a company’s annual average should come close to these baseline benchmarks.
Staying on Top of Billing and Decreasing Accounts Receivable Days
Every day, equipment needs to be repaired, fuel costs increase, etc. The longer it takes bills to be paid, the longer your business has to go without paying your own bills. Getting your accounts payable days reduced as low as possible improves cash flow and liquidity. The best way to decrease accounts receivable days is through proper invoicing. Make sure invoices are filled out correctly so less time is spent chasing down customers not paying due to inaccuracies.
Also, rather than waiting for a POD (proof of delivery) to come back for a successful shipment (and hoping that you remember to follow up if the POD doesn’t arrive), have a designated employee responsible for tracking collections and deliveries to avoid unbilled orders.
If you’re really dedicated to avoiding inefficiencies, you can set up an unbilled revenue report in your ERP system and have your collections team monitor the report consistently.
Don’t Neglect Tax Planning
Financial analysis helps us to not only identify growth opportunities, but also tax liability. We encourage our clients to actively use financial analysis to tax plan, so there are no big surprises come tax time. Nobody likes to owe money to the IRS.
Tax planning helps you identify what you are likely to pay in taxes, and therefore, how much should be put aside in a tax reserve account. It’s important to never touch this account for anything except for tax payments. Keep it out of sight, and out of mind.
Review KPIs Weekly
Look at your key performance indicators weekly, if not daily. Otherwise, you may miss data that could spiral and cause a large impact on financial health. There are roughly 25-30 key metrics logistics companies should be keeping a close eye on, and believe me, I know that sounds unmanageable.
However, it isn’t up to you or your CFO to do all the monitoring. Your team leaders can help monitor KPIs in your stead. For example, shop managers can manage metrics related to maintenance repairs, operations managers can monitor labor metrics, and your financial managers can watch for impacts on your gross profit margin.
Stay Consistent on Equipment Repairs
You might be asking how equipment repairs could be considered a financial best practice. However, seasoned transportation and logistics owners know that operational strategies are really financial strategies. Operating costs impact business financials.
If you’re not managing your shop properly, repair and maintenance expenses can get out of control quickly. While it’s tough to put this weight on your drivers’ shoulders, it often falls to them to take care of their equipment. Remove any obstacles from your drivers’ paths to ensure they are able to come to the shop frequently to maintain their trucks properly. That way, a small repair doesn’t become a large problem (and expense) for the company.
Obtain a Line of Credit Before You Need It
Like we mentioned earlier in this post, a line of credit is essential for a sound cash strategy. Lines of credit are essential for times of downturn. It’s important to obtain this line of credit far before you need it. Often, banks are not usually willing to extend lines of credit during downturns, and when they do, they aren’t on the best terms.
Work with your banker to set up a line of credit equal to your cash reserve during sound economic times and when your financial health.
It’s my hope that this article enables you to begin putting financial benchmarks in place, track KPIs, and incorporate financial best practices into your transportation company. If you have further questions or aren’t sure where to start improving company profitability, contact us for a free virtual CFO consultation.
