by Tim Brady
, Business Editor
The drudgery of business can be summarized in a single word: accounting. Keeping the books is an endless job. When most businesspeople think of accounting, they think of it as a means to paying the least amount in taxes possible. Tracking every expense and revenue, though, impacts more than just the tax bill.
Measuring the financial health of a trucking operation and determining what’s working and what isn’t by looking at the cash flow and the resulting profit, or lack thereof, is very important. Waiting until the facts and figures are urgently needed can result in money being left on someone else’s table or, in this case, in a competitor’s trailer.
Frankly, with the exception of that rare individual who loves tracking revenues and expenses, the vast majority of those owning small businesses have far more interest in anything other than listing debits and credits on a spreadsheet.
So think of business accounting as evaluating the financial position of a business through its sales, purchases, and expenses. Accounting records are maintained in chronological order in a format that can be easily reviewed. You can look at the results of the past, see what’s happening in the present, and forecast the future. The results will easily tell you the overall health of the organization; in essence, they are a graph of the company’s key vital signs.
Through proper analysis, it’s possible to determine whether there are any cash leaks, i.e., areas in which expenses are too high and need trimming, or the possible skimming of funds by a partner or employee. The business owner will be able to tell if a particular product or service his or her business offers is priced correctly or if it needs adjusting. He or she will be able to gauge when growth and expansion is possible or when it’s time to tighten the belt or even batten down the hatches to preserve capital.
On the other hand, if done improperly, accounting and bookkeeping can do more harm than good. The biggest mistakes come from micromanaging the information.
One area of trucking that seems to be vastly misunderstood and where the greatest area of unnecessary micromanaging occurs is when trying to manage a trucking operation and hauling rates based on annual cost per mile figures. Simply put, cost per mile based on total annual cost divided by total miles traveled in a year—while the answer may be numerically correct—is a useless piece of information. The reason? There’s one factor that supersedes cost per mile, and that’s time. The greater the miles in any period, the lower your cost per mile; however, the opposite also holds true. The fewer miles in any period, the greater your cost per mile.
This is true because of your fixed costs, which must be calculated by time not miles. Fixed costs occur regardless of whether a truck moves or not. Because of this, the fewer number of miles a truck moves over a day, week, month or year, the higher its cost per mile will be. If the static per-mile figure calculated over the period of a year becomes nebulous, it’s difficult to determine the financial health and profitability.
The volatility of fuel prices is another reason an annual per-mile rate is of little practical use when analyzing your business. An annual per-mile figure only averages your fuel costs. If the cost of fuel is higher than the annual average calculated, then the hauling rates based on that number will be too low and will take away from the company’s profitability.
If the fuel cost is lower than the annual average, while perceived profit may be higher, the competitiveness of the carrier’s hauling rate is inflated over that of competitors.
Recordkeeping is the heart and soul of any accounting system. Keeping track of expenses, as difficult as it seems, can help increase your company’s bottom line in multiple ways.
For the sole proprietor and partnership-owned companies, every $1 of undeclared expenses represents a loss of about 40.5¢ out of that business owner’s pocket; that amount then goes directly into the coffers of the U.S. Treasury Dept. [[300x250AD]]
Knowing how the company’s money is being spent will allow you to determine whether or not those expenses were necessary. Without correctly categorized expenses, it’s nearly impossible to determine the validity of the expenses.
The first step in controlling costs and reducing taxes is to familiarize yourself with a deductible expense. The IRS defines this expense as “an ordinary and necessary expense incurred while furthering your business, trade, profession or activity for profit. It must also be customary, usual or normal for your particular type of business.”
Note that the expense must also be “reasonable.” As you can see, the IRS has left these definitions open to interpretation. Rather than presume an expense isn’t deductible, it would be better to presume that it is deductible then let your tax accountant or CPA make the final decision based on their experience with the IRS.
Finally, any discussion on accounting and recordkeeping would be incomplete if the subject of using this information to determine your operation’s break-even point wasn’t included. The bottom line is that you need to know not just your company’s break-even point, but the break-even point of each piece of equipment you operate.
In this economy, if every trucking business keeps excellent financial records, thus ensuring the highest profitability and the lowest amount of taxes paid allowed by law, not only will carriers not flatline, they won’t even need a get well card.
Contact Tim Brady at email@example.com or call 731-749-8567. Join Brady in the Trucking Business Community at www.truckersu.com.