Cash is king

RSS

Problems are only opportunities with thorns on them.” –Hugh Miller

You know, when you look at the economic environment trucking is operating in today, having cash on hand has never been so critical. One look at the slowly thawing credit markets and it’s easy to see why cash is so much more necessary – and why truckers larger and small need to sock some away any way they can.

Now – as everyone who reads this knows – I am no business expert. But, lucky for me, I know more than a few, one of them being Tim Brady, business editor for American Trucker magazine. A former owner-operator with well over two decades worth of experience, Tim is a big believer is getting back to the business basics, especially when it comes to managing your cash. Here are some of his thoughts, gleaned from some of the many e-mails we trade back and forth on trucking issues large and small.

loanstar_photos_0171.jpg

“If every trucker and every business person would go back to the basics of business and stick to them we would not have all the problems we as a nation and world face with the financial collapse occurring around our feet,” he recently told me. Those basics boil down like this:

1. You can’t spend more than you have in your pocket.

2. If you don't have the money for something you want, you save by spending less and keeping more in your pocket until you have enough.

3. You make sure you’re not spending your future, by not setting aside a reserve for when things are quite going your way.

4. If you’re going to sell something, be sure you get more for it than what it cost you to purchase it in the first place.

Most truckers just don’t know how to correctly figure their "break-even point," Tim believes, and knowing that is critical to making sure you accumulate cash in the bank account.

loanstar_photos_0401.jpg

“The break-even point is more than a truck payment, insurance, fuel, maintenance, tires, and repairs in a trucking business, and that’s true for all other businesses too,” he explains. “You can't expect to stay in business for very long if your costs exceed your revenue. That’s why figuring every single penny you spend to function in a business needs to be a part of the break-even point. And to truly know the money you need to operate, you’ve got to add in a reserve fund for the lean times, a salary or draw for the owner and a capital growth plan to have the needed cash to grow the company.”

[I’d like to note here that you can listen to Tim and I talk about this and other issues every week from 2 pm to 3 pm eastern time on “The Lockridge Report” broadcasted over Channel 147 on the Road Dog Trucking Radio, part of the Sirius Satellite Radio Network.]

Another business expert that’s got some thoughts on cash is Professor Jerry Osteryoung from the college of business at Florida State University. Cash is the lifeblood for any entrepreneur, he believes, and now is time to start conserving it. Professor Osteryoung, the floor is yours:

“With the economy not doing well and bank liquidity at question, now is the time to conserve cash. If your sales should slump further, you need to make sure you have adequate cash. Without cash, each and every business fails-it is that simple.

Cash is king in this environment and must be managed now better than ever for your firm’s survivability. There are many methods to manage cash and you have to choose the ones that are right for your company. By far, the management of accounts receivable is the one area that most firms have to work on.

Accounts receivable (AR) are like loans which you give to your customers without any interest being earned. Two great ways to monitor your accounts receivable are average collection period and an aging schedule of accounts receivables.

Average collection period is computed by dividing accounts receivable by your sales per day. For example if your receivables are $400,000 and your sales per day for the month or year is $10,000, then your average collection period is 40 days. If you are selling on terms net 30 days then you know you have to do some work on collecting all accounts past 30 days as 50% of your accounts receivable are older than 40 days, which is not good at all.

Now an aging schedule works in conjunction with the average collection period by showing those accounts that are overdue with both their balance and the age of the receivable. Any accounts over 30 days should be gone after as this represents your funds that your customers are using with zero interest.

Once you know who owes you money and how old the AR is then you need to attempt to collect it. While writing letters and calls by staff are okay, one owner of a business calling another one is the most effective means to collect funds that I have seen. Additionally, asking for money is not what your staff really likes to do and by taking the leadership on this, you are showing your staff that you are willing to step into the trenches.

Obviously every firm needs to have a collection policy so that the steps you need to go through to collect these funds are automatic and cannot be slid. Too often staffs just are hesitant to call up and ask for money so that whatever collection policy you have, you need to monitor this with average collection period and a receivable aging schedule to insure that staffs are following through.

The longer you wait to try to collect in today’s environment increases the probability that the firm will go under as not paying bills is the first sign of major financial problems. You avoid so many of these problems by not letting the management of your accounts receivable slip. While some customers might not be able to pay their whole bill, you must to get them to pay something then put them on a COD [cash on delivery] basis to insure that their receivable does not go up.

Now make sure that you are very carefully monitoring your accounts receivable and have policies in place to do this with both an average collection period and an aging schedules. Additionally, you must have a very rigorously followed account receivable collection policy.”

Good advice indeed for the tough times that lay ahead.

What's Trucks at Work?

Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

Blog Archive

Sponsored Introduction Continue on to (or wait seconds) ×