Increase Your Gross Margin by 58% with Only an 8% Increase in Revenue
In last week’s article, we presented a way to segment your financial statistics to provide a clearer picture of your gross margin, the key functions of your success (or under performance), and ultimately your profitability (or lack thereof).
Further, we provided a ratio which will provide a quantitative target to improve your performance. As quick review, we (TCA’s Best Practice Groups) calculate Gross Margin using the following formula:
(Linehaul Revenue no FSC + Accessorials)
(Driver Wages & Benefits + Purchased Transportation + Net Fuel Expense + Maintenance + Equipment Financing Expense + Insurance Expense + Variable Driving Expenses)
= GROSS MARGIN
*Each of the above items can contain many things, depending on your operation. If your interested in figuring out which expense and revenue items to include, please email Chris Henry ([email protected]) to get more information on our QuickStart data survey.
Using the above formula, and two separate components of your fixed expenses (Admin or ‘Non-Driver’ Expense, and Fixed Overhead), we have developed the ratio, which we call the Golden Ratio:
The Golden Ratio
25% Gross Margin :
25% Admin as a Percentage of Gross Margin :
25% Fixed Overhead as a Percentage of Gross Margin
If you do the math, reaching these targets equates to a very healthy Operating Ratio (compared to historical industry results), and also provides a great rule of thumb for evaluating existing customers and new opportunities. For this week, and subsequent weeks, we will be focusing on ways to improve on each of the components described above.
For this week, we will be enlightening some readers on a way to increase Gross Margin by 58% with only an 8% growth in Revenue.
To start off, let’s look at the following revenue and variable statistics for a sample load:
1. Rate/Mile $1.66
2. Miles 1,000
3. Loaded Revenue $1,660
4. Avg. Op Cost/Mile $1.43
5. Load Cost $1,430
6. Gross Profit $ $230
7. Gross Profit % 13.86%
8. Paid Deadhead $0
9. Total Gross Profit $230 (13.86%)
Now, the above is a pretty simplistic example of a ‘sample load’, however the purpose of this exercise is to reinforce the power of small changes. These small changes should be within the control of your Fleet Managers, and these valuable people should be incentivized to make (and test) these changes routinely with the loads they are responsible for, and within the confines of the contractual shipper terms.
In keeping with the purpose of this exercise, look how simple it is to grow your Gross Margin by 58%, with only an 8% increase in Revenue:
BEFORE CHANGE AFTER
1. Rate/Mile $1.66 +8% $1.79
2. Miles 1,000 1000
3. Loaded Revenue $1,660 $1,790
4. Avg. Op Cost/Mile $1.43 $1.43
5. Load Cost $1,430 $1,430
6. Gross Profit $ $230 $363 (+58%)
7. Gross Profit % 13.86% 20.28%
8. Paid Deadhead $0 $50
9. Total Gross Profit $230 (13.86%) $413 (23.07%)
In review, the only differences between the first and second scenarios was: 1) A 8% increase in rate per mile, and 2) $50 of paid deadhead. All other items remained unchanged, your variable operating expense did not change (it’s the same load), but your total Gross Profit improved from 13.86% to 23.07%. On the revenue side, these are just two examples on maximizing revenue per load. There are undoubtedly additional accessorial charges that are typically not tracked or properly applied to many of your loads, which is effectively an opportunity cost you want to eliminate (or greatly reduce).
The above reinforces the value of a quality and detail-oriented Fleet Manager to maximize your revenue per load. From a strategic point of view, taking care of the pennies will result in more dollars flowing to your bottom line.
Next week, we will focus on implementing the proper processes to maximize revenue capture per load. The following week, we will discussing ways to incentivize your Fleet Managers to improve Gross Margin.