Let’s be very clear: cash is not king… cashFLOW is king.
Running a trucking company requires a lot of attention to detail. If anything falls through the cracks, your company could face costly issues.
As a new trucking start-up, the biggest reason owner-operators fail is not having enough money saved up before going on their own to manage start-up costs, maintenance emergencies, or lagging payments after finishing a load.
Why? Because their first few loads will not be paid until 30, 60, or 90 day later from the shipper invoice.
Managing cashflow is crucial for success. So, let’s break this down in a two-part series: managing cash inflow and cash outflow.
What is Cashflow?
Before diving in, let’s first cover the basics.
Cashflow is simply the amount of money coming in versus the amount of money going out of the company. It is your inflow and outflow of cash.
- If you have positive cashflow, this allows you to pay bills, reinvest into the business, and build a safety net for maintenance issues, low freight rate cycles, and more.
- If you have negative cashflow, you can try to survive while living in debt and hope your negative cashflow doesn’t kill your business.
The way you control positive cashflow is to speed up the inflow and reduce the cash outflow.
As a new owner-operator, you should save up for at least 6 months of operation, which is around $100,000 for a single truck owner-operator. This will help you manage the large amounts of cash outflow before you get paid for your first few loads 30-90 days later.
This is because, on average, truck expenses usually cost around $15,000-$20,000 per month for a single truck. And this can be worse during a market downtrend because diesel prices, inflation, or interest rates are high.
Once you start getting paid, everything is golden, right? Well, this is where the real work begins.
As a carrier, you can increase cash inflow by bringing in more money or speed up when that money comes in. Four ways to do this are to charge more, use factoring or broker quickpay options, work with trusted shippers directly, and follow-up on invoices.
Many trucking companies experience cash flow problems because they don’t charge enough per mile to cover their expenses.
If you accept these super low rates, then the shipper assumes they can continue to get away with it. But you are the one moving the product, you are the professional, so make sure you know what your costs and worth are.
The most important thing for you to do for every load is determine your truck freight rate and cost per mile so you can cover your expenses and expected profit.
Just remember that these rates will fluctuate depending on your routes, if you are going in or leaving certain regions, and more.
- To calculate cost per mile, you need to 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.
- A truck freight rate is a price a shipper or broker will pay you to haul a load. While this sounds simple, these rates per mile can vary significantly depending on the time of year and current fuel prices.
The most important number when it comes to calculating truck rates is the number of miles between your starting point and the destination.
After distance, you need to know the weight of the shipment. To control costs, you must carefully manage the overall weight loading for your fleet. If you start with a higher rate for heavy loads, even if the shipper negotiates a discount, you will still end up with more total revenue.
Lastly, you need to know the shipment density so you know how much room a shipment will take up in your truck. Once you know the weight of the shipment, calculating the shipment density is simple. All you do is divide the cargo weight by its cubic feet.
When it comes to loadboards, to find the best trucking rates you should:
- Gauge load activity by origin and destination with load density. This means find out how many trucks are already in the lanes you want to travel and whether negotiations will be favorable, balanced, or unfavorable.
- Monitor load-to-truck ratios. In general, as the number of available trucks rises, rates go down. As the number of available loads rises, rates go up.
- Search high-paying loads across lanes. But be careful. You don’t want to get stuck in a region and find it hard to get a load out without losing money. You may find it better to accept a decent load and have another decent load out versus a great load going in and losing money or being stuck without a load to go out.
This dance of loads, lanes, and rates is hard to manage, so if you can find a trusted broker, you can pass this headache to them. But, as always, this comes with a fee.
Temporarily use factoring or broker quickpay
Factoring is the selling of the invoice after you complete the load to the factoring company.
Doing this allows you to get paid that same day, but with a cut for the factoring service. Carriers then use that cash to fund operating expense moving forward.
The goal here is to look for good factoring rates.
Factoring companies often take 10% for their service, but we have seen them as low as 5%, so do your homework and look around.
If you are dealing with slower cash inflow, then factoring is an opportunity to manage the market downtrend until things get better.
However, factoring should only be a temporary solution.
Professional carriers need to find ways to save and prepare for slow invoices so they are not dependent on giving away profits to another company.
Another option with brokers is their quickpay programs.
Depending on the broker and your relationship with them, they may offer to pay your invoice early, in one to seven days, and take a 1% to 5% fee. This option is cheaper than dealing with a factoring company but may not be available with all brokers and they determine the terms and cost.
Working with shippers directly
Loadboards are not the only source of loads.
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.
When it comes to customers and cashflow, here is what you need to know.
Vet your customers carefully by understanding their Risk Profile. To guard against payment default, you should regularly check the credit ratings of the companies you serve.
A low or declining credit score could mean that a customer or broker is in financial trouble. So, you should:
Some factoring companies and other financial providers offer free credit scores and days-to-pay information on thousands of brokers and shippers.
Then, make sure to state your terms clearly on both the credit application, rate advisory, and invoices before moving the load with them.
Follow up on invoices
Remember, your goal is to increase money coming in or the speed which they come in.
However, businesses are often too busy running day-to-day operations to remember to follow up with clients about paying past-due invoices.
While mistakes happen, invoices can sometimes get lost in the shuffle. If you aren’t following up on your open invoices, you’re leaving cash on the table and your cash flow will be slow.
It is best practice to:
- Invoice your customers every day versus saving those invoices up as a batch and send out a week or two later
- Create a follow up plan that helps you professionally collect on your invoices from your clients in a timely manner. You can do this by making receivable calls the day an invoice is due, work your receivables weekly, and run account receivable reports weekly.
If you do this well, it can also be a great way to check in with your customers and strengthen your relationships.
In the second part of our managing cashflow series, we will discuss managing outflows. Stay tuned.
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