Carriers can preserve profit in a weak freight cycle only by acting now: expose cash leaks, shorten the delivery-to-payment interval, reverse controllable cost inflation, and use lane data in customer negotiations.
In The Sun Also Rises, a character explains bankruptcy as happening “gradually and then suddenly.” Success can develop the same way. Decisions made during the previous two years determine how a business performs during the next two.
The industry's downturn did not make poor outcomes inevitable, but the available profit-preservation methods were not passive. KSMTA divides the actions into internal steps and external steps.
Internal Actions
Be Transparent
Financial and operating transparency is a common trait of high-performing carriers. KSMTA suggests an anonymous employee survey asking how many cents remain from every $1 of revenue after all expenses.
With at least 50 responses, estimates may range from $0.01 to $0.65. An employee who does not understand the narrow profit opportunity is less likely to negotiate one more time with a broker or seek another repair estimate.
Teaching the economics of trucking gives employees context for decisions that protect margin.
Make the Cash Flow Statement the Priority
The income statement receives too much attention when transactions outside the P&L are consuming cash and increasing the need for expensive working capital.
A cash flow statement separates operating, investing, and financing activities. In a difficult economy, the focus should be operating cash. If receipts do not cover current obligations with a reasonable buffer, the carrier needs a deeper review of major costs and may face difficult decisions.
Measure the Cash Conversion Cycle
For a carrier, the cash conversion cycle starts when the driver leaves the consignee after delivering the load. It ends when payment is deposited or received by ACH.
The interval from delivery to billing is under the carrier's control and may range from less than 24 hours to more than eight days. Identifying the bottlenecks in that process can improve the full conversion cycle and materially affect cash flow.
Control Future Inflation
Not every cost increase comes from the market. Categories also inflate when discipline weakens, and strong revenue can hide the damage.
A common example is relaxed hiring and training standards used to fill trucks during a strong freight market. Returning to prior standards can reduce the risk that insurance premiums and self-insured losses consume the profits earned during the boom.
External Actions
Be Transparent With Customers and Vendors
Carriers should continuously share year-over-year changes in major cost categories. KSMTA clients experienced non-fuel cost inflation from 17% to nearly 38% for September 2022 year-to-date compared with the same 2021 period.
Fuel expense was partly offset by fuel surcharge, but carriers paid for fuel immediately and might wait 60 to 180 days for reimbursement. Driver wages and benefits, maintenance, equipment, and insurance accounted for much of the remaining inflation.
Presenting these figures before and during bids builds trust and strengthens the carrier's negotiating position.
Get Surgical About Pricing and Capacity
Lane-level profitability allows a carrier to respond to an RFP with precision. A rate reduction on one lane may improve balance elsewhere in the network, while another lane may not support any reduction.
FreightMath provides the framework for explaining both decisions with data.
Leverage Brokerage
Carriers should build partnerships with other carriers whose capacity and freight patterns fit lanes the asset fleet cannot serve profitably.
An asset carrier's brokerage should not depend only on overflow from the fleet. During an RFP, it can satisfy shipper demand and retain margin on freight that would otherwise move to another provider.
The objective is to fill cash-flow leaks before they become acute. These actions create a clearer view of the true cash position and the opportunities to increase free cash flow.