Keep Accounting Separate
Understanding the financial strength of your trucking business is imperative to its ongoing financial success. To gain this understanding, it’s essential to segregate the trucking segment from the farm operations segment, whether you do so by placing the trucking segment within a separate entity or simply by leveraging managerial accounting. Taking this approach will help identify whether the trucking segment is profitable or draining profits.
Understand Measures of Financial Strength
Traditionally, a thriving operation will work to maintain a 2.0 working capital ratio, which equates to $2.00 in current assets for every $1 in current liabilities. Today, many people relate working capital to revenue; for a strong financial position, we recommend maintaining a minimum working capital of at least 25% of revenue. Monitoring the relationship of working capital to revenue allows the business to monitor the movement of this ratio and assess if it’s in an upward, steady, or downward trend.
Many business owners fail to consider future obligations when reviewing their financial position. Simply reviewing the income statement and observing a cash profit (or loss) is inadequate. The net profit of the business must be enough to cover debt payments, income tax, replacement of assets (or growth) and family living/draws. A strong working capital position will help fund day-to-day obligations without requiring you to take on additional debt.
Use Profits Wisely
AgriSolutions utilizes the historical performance analysis as an in-depth tool to help businesses identify where they are spending money and where they should be investing profits. In addition to maintaining a lucrative working capital, AgriSolutions maintains the 25/25/25/25 rule to determine where profit should be utilized. The rule states that 25% of the operating profit of the business should be used for each of the following expenses:
- Owner withdrawals and income taxes
- Repayment of debt principal
- Growth and asset purchase
Account for All Costs
An operation that is exclusively trucking must take further steps to measure and evaluate additional calculations to ensure financial success. It is essential to identify the average costs of operating each unit so you can determine what your margin is to earn a profit on a load at any given rate. Calculating the miles per gallon on a unit is standard, but it is also essential to be familiar with the fuel cost per mile driven. Typically, this figure ranges from $0.30-$0.60 depending on driving habits, actual fuel cost paid, and engine performance. Total miles (laden and unladen) differs from revenue miles (laden only), and these fuel costs per mile should be tracked separately. Having too many empty miles equates to missed revenue and additional fuel burned. However, if the load revenue is inadequate, then it might be better to “bounce back empty.”
Each mile the unit is driven causes wear and tear, which, over time, increases repair and maintenance costs. When hauling a heavy load, the wear is naturally increased. In addition to knowing your fuel cost per mile, knowing your maintenance and repairs cost can help identify your profit margin. For example,
- An engine overhaul can cost around $20,000–30,000 and last approximately 1,000,000 miles
- An oil change might cost $250–300 and must be repeated every 25,000 miles, equating to approximately $0.03–0.04 per total mile.
A sudden increase in maintenance costs could indicate a hidden problem that’s reducing the overall profitability of your business.
To recap, some important factors to consider include
- Average miles per gallon
- Total miles versus revenue miles
- Revenue per total mile
- Fuel cost per total mile
- % of empty miles (compared to total miles)
- Repair and maintenance costs per unit
- Unit margins
Do you understand the profitability of your trucking business? Are your repairs expenses eating away at your profits? Should you be charging more to cover your costs? These are all vital questions that will ultimately determine the business’ financial well-being. If you believe your farm operation could benefit from AgriSolutions’ financial services, click the link below to request a free consultation, or give us a call at (618) 372-3000.