Getting your Fixed Overhead in Order

This week’s post is the last in a series of articles focused on the Golden Ratio, a concept which has proven to be a successful way to frame and segment the operating expenses of a high-performing trucking enterprise. The Golden Ratio separates your variable expenses, your admin (non-driver) wages and benefits, and finally your fixed overhead. Re-aligning your existing P&L can be a time consuming process, but the feedback from companies who have adopted our suggested reporting model has been extremely positive to date.

For many, when you start talking about financial statements, eyes start to glaze over. However, having a set of proven and transparent (and thoroughly reconciled) financial statements each month will provide a great foundation for transforming your business. Based on my experience over the past three years with all sizes of trucking companies, I can attest that very few companies are employing a common, industry-specific, Profit and Loss statement. As a result, much of the industry isn’t getting a clear picture of the health of their operations, and as a result (in some cases) may be making improper business decisions. The added benefit of utilizing a proven, industry-specific P&L, is the ability to compare against your peers in an easier fashion. Standardization is at the core of inGauge and the Best Practice Groups. That is why we freely provide a proven P&L template for any company to download and use. To download the excel version, click here.

At the bottom of the template P&L, we break down the individual components of the last piece of the Golden Ratio: Fixed Overhead. Notably absent from Fixed Overhead in this template is Admin Wages and Benefits. Many of the existing P&Ls which I have reviewed over the years contain Admin Wages and Benefits. The common rationale provided has been that Admin Overhead is fixed and does not go up or down depending on levels of business activity. Our position is that this is incorrect and harmful thinking. Although you aren’t going to immediately layoff valuable Fleet Managers or Accounting staff when economic activity slows, breaking out this component from Fixed Overhead will provide you with a quicker route to decisions to maintain profitability while you ride out a downturn. Also, it reinforces the importance of incentive-based pay structures for your Fleet Managers, something we will talk about at a later date in a series of posts.

As a reminder, the target for inGauge users and Best Practice Group members is to achieve and maintain a Fixed Overhead level of 25% of Gross Margin. In other words, after subtracting your variable expenses from your revenue, your Fixed Overhead should be approximately 25% of this calculated value. Obviously, Fixed Overhead is going to fluctuate over time (e.g. you implement a new TMS or communications platform that includes upfront costs that you don’t want to amortize), but over a rolling six-month period, this should be a consistent goal for all. How do you get your Fixed Overhead on the right track? The three biggest opportunities for improvement based on companies we have worked with are:  1) Building Rent / Maintenance/Property Taxes , 2) IT related expenses and 3) Phone/Communications.

If you own your own property, you may be setting rent levels for your operating company for tax purposes. However, if you currently rent your facility, you may have substantial tools for improvement. This can include leveraging continued low interest rates to purchase or build your own facility. Many of our clients have done just that, and amplified the benefits by moving into a different (but close) municipality to take advantage of ongoing business incentives. Further, considering a new location allows you to better match a facility with the current attributes of your business (e.g. cross-docking capabilities etc). Finally, getting your current zoning and/or property valuation reviewed by a property tax expert can result in immediate and perhaps retroactive credits.

IT-related expenses can be a massive line item, and can vary substantially from company to company. Many companies have started to take advantage of cloud-based software solutions to drastically reduce their IT spend. Moving from locally hosted email/network configurations to cloud based services such as Google @ Work or Office 365 can immediately eliminate ongoing hardware (server) expenses, and depending on the size of the company, network admin labor. You may get resistance from your IT Team initially, but you should strongly encourage the investigation of cloud-based tools, and a thorough cost-benefit analysis. This should be done regardless of the size of your organization. Further, although many TMS providers currently focus on local installs, we suspect the trend over time will be move to the cloud – which will ultimately save money for Trucking companies and TMS providers alike.

Many of the companies we work with have reported substantial savings by routinely (every 2-3 years) shopping their communication needs with other suitable providers. Both hardware and networks costs have continued to drop over the years, and the vendor will be the last one to mention opportunities to save. Like any other expense, the key function is having a process in place to systematically review usage, costs and benefits to determine if you’re getting value for the expense.