Creating growth is not based on luck. Growing a trucking company requires a solid business plan. This plan looks at the company’s potential, projects its revenue needs and then determines where growth plateaus will occur, thus being prepared with both cash and assets as each plateau is reached.
One of the biggest mistakes many companies make is trying to grow too fast. The first rule of growth is being prepared with the capital investment needed, yet at the same time ready for the drain of cash while new equipment starts producing enough revenue to support itself. As any successful business person will tell you, growth initially drains assets both in cash and in personnel, so you must plan growth very carefully.
Try these pointers:
- Have a complete business plan. Know your numbers (expenses and income). Be sure your growth has a real opportunity for success.
- Evaluate your market and know it will support your growth.
- Have a vision of how you’ll reach each step in your growth plan.
- Set revenue goals. Have the facts and figures on what you’re doing based on your plan. If it’s working, stay the course; if it’s not working, adjust or scrap the portion which is not achieving its goals.
- Know your break-even point, the figure which changes every time any expense increases or decreases. It’s where losing money stops and profit begins.
- Be sure you’ve included in your break-even costs a salary for yourself, and anyone else working for your company. Any company owner waiting for profits to pay his salary is doomed to working for someone else. Your profits are where your funds for growth will accumulate; it’s not your salary.
- Determine a profit margin that will retain your competitive position while growing your capitalization fund.
How do you use that fund to grow? Let’s use a hypothetical example to calculate a plan: You’ve determined through your growth plan that you will require a capital investment of $200,000 to purchase additional new equipment, hire and train drivers, and add a dispatcher. Your current annual fixed cost for two trucks runs $160,000 per year, including your salary and the salary of your other driver. Your break-even point on both trucks is currently $7,700 per week ($3,850 each).
The Growth Calculation Formula:
- Take your annual fixed cost of $160,000 and multiply it by 1.5.
- This equals $240,000, or what it would cost to keep your doors open for 18 months if your trucks were parked. It includes both your salary and that of your employees, and is your first capitalization fund objective: an assurance you’ll stay in business during both growth and difficult times. Next, determine the weekly profit margin required for each truck. True capitalization requires time, usually three to five years to reach your first growth plateau. We’ll use three years to calculate our example:
- a) 156 weeks divided into our $240,000 Capitalization Fund Objective, which equals $1,538.46 per week.
- b) Add this amount to your weekly break-even point of $7,700 for total revenue required for both trucks of $9,238.46, or $4,619.23 each week for each truck to reach the first plateau.
- In reality, three years is a goal. But one engine in-frame, one change in the market, or an economic downturn can slow progress to the Capitalization Fund Objective. The idea here is to set the goal in the shortest, most realistic time period.
Note: Your break-even point changes according to how your costs either rise or fall. It needs to be recalculated weekly or when there are extreme changes in certain costs like fuel. But the Capitalization Fund Objective amount remains constant. You also need to evaluate the gross hauling rate per week and be sure it doesn’t exceed the revenue-producing capability of the equipment, the freight being hauled, or the lane being run. If it does, extend your Capitalization Fund Objective period from three years to a period more in line with your hauling rate capacity.
- Now calculate into your Capitalization Fund Objective the additional $200,000 in capital required to increase your hauling capacity and reach the next plateau.
- a) First, add your $240,000 Capitalization Fund Objective and our projected $200,000 additional capital requirement. This equals $440,000.
- b) Divide the new Capitalization Fund Objective of $440,000 by the number of weeks needed to reach the objective. We’ll use 3 years or 156 weeks again for our example. This now equals $2,821 in additional revenue per week above our $7,700 weekly break-even point to reach our Capitalization Fund Objective; $10,521 per week in gross hauling revenue, or $5,260.50 per truck. If the total required revenue per truck is higher than the revenue capacity of your trucks, then adjust your plan. Either increase the time to reach your Capitalization Fund Objective until the revenue capacity for your trucks matches your gross hauling revenue (which includes both break-even point and the Capitalization Fund Objective), or increase rates, or decrease costs.
There are more complicated formulas for capitalizing a company that take in variables like debt reduction and discounted cash flow analysis. But for the small motor carrier, the formula needs to be simple and straightforward, and one that will make visualizing goals easy. Creating a realistic and attainable Capitalization Fund Objective will help grow your trucking company.