by Tim Brady, Business editor

drainAs the owner of a business, you need to regularly check daily revenue and expense numbers. But in doing so, are you missing something in the big picture that could spell the end of your business?

To ensure you are not slowly bleeding cash, conduct a periodic line-item cost analysis and review your hauling rate range to ensure it is sufficient enough to meet your capitalization goals. Re-evaluate what you’re hauling and where you’re transporting it.

Take advantage of slow times to reflect on what will move your carrier into a well-planned future. In short, it’s time to review your financials.

Every carrier, regardless of size, should do a line-item cost analysis at least once a year. If, at any point in the year, you notice you are paying out more than you take in, then you need to conduct an analysis. Don’t wait for an annual review if this is happening; by then it may be too late to trim expenses.

What’s a line-item cost analysis? It’s the evaluation of every cost related to operating your business. It’s making a determination of each item or service required to do business and whether it contributes positively or negatively to the operation.

Before cutting expenses, evaluate the overall impact eliminations or reductions will have on the entire operation. Cutting costs haphazardly can be more destructive than doing nothing at all. This causes other costs to inflate, thus increasing your company’s costs overall.

Evaluate the net effect of any cut or reduction across your entire business; just because it decreases a cost doesn’t mean it’ll increase profitability.

As a drastic example, if a trucking company were to eliminate all fuel costs, it would have gotten rid of one of its highest expenses, but it also would have made it impossible to service its shippers as the trucks sat parked. You must choose wisely as to where the cost ax falls.

Determine what happens if you eliminate an expense altogether. Ask yourself these questions:
  1. How necessary is the item, service or person?
  2. What would happen if the item, service or person was eliminated?
  3. Would it lower or improve customer service?
  4. How would this affect overall efficiency?
  5. Would something or someone else have to fill the void left by eliminating this expense?
  6. Would eliminating the expense cause other costs to increase or decrease? If so, by how much?
  7. What is the net cost increase or savings after the elimination?
By studying the entire picture of what happens when you cut costs, you begin to see the effect of your actions. You must spend money to make money, but it’s how wisely you invest those dollars that determines your level of success. Costs don’t exist in a void, so for every expense cut, there’s a cost or time requirement needed to fill the void.

If in eliminating the expense, your analysis indicates an increase in the company’s break-even point, then the next evaluation should look at whether reducing the expense provides the necessary cost savings. It doesn’t seem logical, but in our previous example, finding ways to reduce fuel spend (i.e., by consolidating loads or smarter fuel purchasing) may turn a losing freight lane into a profitable one.

Following are questions you need to ask to determine what happens if you reduce the expense instead of cutting it:
  1. At what level is the item, service or person necessary?
  2. What happens if the cost of the item, service or person is reduced?
  3. Would it lower or improve customer service?
  4. How would this affect overall efficiency?
  5. Would something or someone else have to fill the void left by the cost reduction?
  6. Would the cost reduction cause other costs to increase or decrease? If so, by how much?
I’ve found that after doing repeated line-item cost analysis, most large expenses, if cut, cause the biggest increase in other costs, thus negating any real savings. It’s usually the reduction or elimination of the small costs that actually add up to the greatest net savings.

Don’t misunderstand me; controlling costs in all areas is vitally important. But constantly checking to see if there’s a money drip coming from your cash flow faucet is one way to be sure your hard-earned cash isn’t going down the drain.

And look at the entire freight lane revenue to determine profitability. While it’s extremely important for each truck to meet its break-even point on each load, it may not create a profit on each leg of a freight lane.

Evaluate whether the truck is showing a consistent profit at the end of each month, quarter, and year’s end. Here are several steps to do that:
  1. Know your break-even point on each piece of equipment.
  2. Know your capitalization (amount of money in reserve) requirement to grow your company and divide that need between all your operating equipment.
  3. Develop a rate range based on the combination of those figures for each piece of equipment.
  4. Measure what you’re currently receiving from each customer and each lane in which you operate over a period of a week, a month, and a quarter.
  5. Is the revenue of the customer and lane exceeding your break-even point for the equipment involved?
  6. Is the amount meeting your projected capitalization requirements? When? Weekly, monthly, or quarterly? If not, then in order to increase revenue, renegotiate your contract with the shipper to meet revenue needs, or find other loads to mix into the lanes in which this equipment travels.
  7. Are you able to increase revenue? If not, then you must decide whether or not you will retain the lane/shipper.
Each truck is essentially its own profit or loss center. Be sure to review your financials and prosper.