Is your overhead too high? With slim profit margins and high inflation, money flowing out day and night, and claims payouts are an “if-not-when,” for transportation and logistics companies, keeping overhead costs under control can feel like an uphill battle.
How do I help clients win the fight? It starts with three questions
1. Do You Know Where You’re Spending?
With so many expenses (some prepaid, some belonging to multiple categories), it’s essential to follow industry best practices when you prepare your financial statements.
The two big groups of expenses are purchased transportation and operating expenses, and each can be subdivided into several more categories. If you have a line of credit or a loan, you’ll also want to account for the cost of money.
Why categorize and subdivide expenses? It’s the only way you’ll know if your costs are out of line with industry standards.
How much is typically spent on purchased transportation? Industry benchmarks come in around 83-86%, with 38-40% going to driver wages/benefits (including taxes, benefits, workers comp, in addition to salary). But don’t include group health insurance benefits for the entire company in one line, since a portion is related to drivers and a portion to administrative staff – this kind of detailed bookkeeping will allow you to understand the fully loaded cost of each driver and see how much (or if!) you are profiting on the jobs you take.
Insurance and claims are another area where we see mistakes. This should account for around 4-5% of line-haul revenue. Never ignore this category, even in months without claims. Claims are a when-not-if, so book something monthly and you’ll have smoother financials, which creates confidence in your business when you deal with a bank or prepare to sell.
2. What Are Your Problem Areas?
Creating groupings allows you to identify and troubleshoot trends – for example, steadily increasing repair costs could be the sign of an aging fleet, so you might want to consider replacements.
Here are some common problem areas, when it comes to expenses:
Labor:
How many drivers does your company need? How efficient are they? Are there needed areas of training? What is your retention rate, and can you improve it? Can you improve efficiency with technology and processes? How is your compensation structure? Are wages aligned with gross profit?
Repair and maintenance:
How high is your fleet age? Are drivers proactive about repairs and maintenance to avoid a snowball effect?
Fuel:
Even though you have no control over price, you can always look to save on fuel by reducing idle time.
Equipment costs:
Are you getting discounts? How many damage claims do you have on your equipment?
Cost of money:
If you’re spending more than 1% on your line of credit or equipment loans, it might be because you are overborrowing or because you don’t have favorable terms with your bank. If you’re spending less than 1%, you might need to up your borrowing and look for new opportunities to invest in your business.
Depending on the issue you uncover, you might have an easier time making adjustments. You can’t just revamp pay structure in an afternoon, but if you identify and track key metrics that impact your bottom line, you can sketch a roadmap to follow.
3. Does Your Team Know How to Help?
Transportation moves fast. That’s why I recommend creating a dashboard to monitor these areas frequently, weekly, daily or even hourly.
By staying on top of things, you prevent problems from snowballing. But don’t try to track every little thing. Pick a few areas and be consistent – we go over our key metrics with clients on a weekly basis. My clients always say they appreciate having someone to hold them accountable.
But you shouldn’t try to do this on your own: with a dashboard you can educate and involve different people in the organization. Shop managers should manage the repairs and maintenance, logistics operations managers should watch their labor versus gross profit, and the list goes on.
If you want to increase revenue and profit margins, start by getting your expenses under control:
When these percentages get out of line, they drive down profitability. Expenses may increase temporarily – for example if you make a big hiring push – but you should always look for opportunities to get them back in line.
If you need more assistance controlling overhead, feel free to check out our virtual CFO services for transportation and logistics companies or talk with one of our virtual CFOs by scheduling a consultation below.
