The Golden Ratio: Succeeding with Gross Margin
In my previous life as a Truck Dealer, I habitually tracked our Gross Margin on both the Sales as well as the Parts/Service side (it was our lifeblood). Further, through my participation in benchmarking within the Dealer market, it reinforced the value of:
- Identifying and measuring your fixed and variable expenses relative to each other
- Always striving to increase Gross Margin (Revenue minus Variable Expenses)
When I entered the trucking industry via my role as Lead Facilitator with TCA’s Best Practice Groups, one of the biggest surprises early on was the number of trucking companies tracking their gross margin (it was almost zero). For many years, I heard many reasons why gross margin had no place in the trucking industry. It’s too complicated! Too difficult to isolate variable expenses! Seasonality!
However, using the aggregated financial data from Best Practice Group members, I was able to isolate the continuously high performing fleets from the rest of pack. When I dove deeper, low and behold, my good friend Gross Margin emerged as one of the key determinants of long term success in a trucking operation. The next step was introducing the concept to those Best Practice Group participants who were unfamiliar with the concept. Over the course of years, we’ve been able to provide a simplified formula for calculating Gross Margin, and as a result a key ratio emerged, which I will talk about down the page.
The first step in any benchmarking program is developing consensus and standardizing the data and metrics. Using this process, we were able to utilize existing data points to arrive at a formula for determining Gross Margin:
(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.
After we were able to calculate Gross Margin for all group members, it was determined (no surprise) that Gross Margin had the highest correlation to profitability than any other metric we were calculating. Further, once we were able to separate Variable versus Fixed expenses for all group members, two further relationships emerged. Those with higher continuous profitability also maintained consistent Admin and Fixed Overhead values relative to their gross margin results. Because of this new information, we have developed something I like to call the Golden Ratio (25/25/25):
The Golden Ratio
25% Gross Margin :
25% Admin as a Percentage of Gross Margin :
25% Fixed Overhead as a Percentage of Gross Margin
We’ll let this concept percolate for a week. Next week, we’ll start talking about ways to hit these targets!