Turning it around

You exhausted your cash reserves on Tuesday. Your fuel vendor, which has been slashing your credit float, is now demanding payment on delivery. You have taken advances against all your outstanding receivables. Half your trucks are broken-down heaps, and you are upside-down in the others. Payroll is due tomorrow. And your banker just left a stern voice mail – his second of the day – for you to call him immediately.

In case you haven’t noticed, you are in serious trouble. But this shouldn’t surprise you. Along the way, you should have been checking your company’s course regularly. And even if you weren’t, there had to be some warning signs that you missed. And if you couldn’t handle this yourself, then you should have brought in some help.

Of course, it’s not in the nature of many company owners to seek outside assistance. “Admitting that you have to hire someone to help you is difficult,” says David Freeman, a director of Capital Resource Partners in Knoxville, Tenn. “Too often, we don’t get the call until it’s too late.”

No real direction?
Although sudden catastrophes do happen, most trucking companies get into trouble over a period of time, says Richard Bell, owner of Bell & Company, a North Little Rock, Ark., firm that helps trucking companies and others get back on track.

“Sometimes it takes a year or two to build up,” Bell says. “A lot of people put their head in the sand. They are eternal optimists.”

So what do you look for? “The financial guys tell you to look at loan covenants, but that doesn’t tell you very much,” says Jay Taylor, another director of Capital Resource Partners. Those covenants – pledges to keep certain financial ratios within certain tolerances – typically were set when the economy was strong, so most companies probably aren’t meeting covenants, Taylor says.

Freeman stresses tracking key performance factors religiously. “The critical thing for a company to survive is to recognize where performance has turned and is going down.” Freeman suggests keeping the most recent three years of performance data – revenue per mile, miles per truck, revenue per truck, miles per gallon and so on – in a spreadsheet. Ideally, small carriers should track performance indicators monthly – quarterly at a minimum, Freeman says. Larger carriers track key numbers even more frequently.

Because cash is king in trucking, some of the most useful numbers to track are cash flow indicators. One indicator is payables. If you are pushing off payments to lenders and vendors because you don’t have the cash to cover the payment on time, that’s obviously a concern.

Another cash flow indicator is days sales outstanding, or DSO. But DSO is more than just a cash flow management tool. “If your receivables are stretching out, that can indicate a deterioration of quality in your customer base,” says Bob Hoyt, the head of Philadelphia-based Partners for Corporate Renewal, which helps turn around failing trucking companies, especially larger ones. (For more on DSO, see CCJ, September 2001, page 84.)

The key is to keep these indicators improving or at least holding steady. And if there is deterioration, managers need to act on that information immediately. “Once the owner sees these heading the wrong way, he needs to intervene and not blame it on external forces, such as the economy,” Freeman says.

Accepting the need to track key indicators is easy; actually doing it can be tough.

“The problem is that there’s so much data in the trucking business, people don’t know how to assimilate it,” Hoyt says.

Also, any system for tracking financial results needs to account for “hidden” costs, such as depreciation. Many carriers, Hoyt says, look solely at whether they are generating positive cash flow each month. Then, when they hit their normal trade cycle, they can’t afford to turn the equipment. That means stretching out the cycle, incurring greater maintenance costs and getting into even deeper trouble, Hoyt notes.

Warning signs
If you fail to catch deterioration in your business yourself, eventually others will. Often, the quickest indication that you are getting into trouble is how business partners, such as lenders and vendors, deal with you. These clues generally will come months before you hit a crisis.

If you are having cash flow problems, the first thing you will do is stretch out your vendors, Taylor notes. “When they start to scream loudly, you have a problem.”

Taylor points to two types of vendors in particular as bellwethers: fuel and road repairs. “They don’t give you a whole lot of credit.” Big carriers might have as much as 30 days credit, and smaller carriers will have half that or less.

If a fuel vendor has traditionally extended you 15 days of credit and you start taking 17 or 18 days – an indication of cash flow problems – the vendor might respond by cutting you back to 7 days or 10 days. That’s a clear shot across the bow, Taylor says.

Another warning sign is a call from your banker for no apparent reason, says Kenneth DeWitt, a principal in the accounting and financial consulting firm DeWitt & Dyer, based in Northport, Ala.

“A banker will hear about you through his board of directors,” DeWitt says. The bank’s board members talk to local vendors, who might mention you aren’t paying promptly. If you aren’t accustomed to speaking regularly with your banker, you can assume that a friendly call just to see how you are doing is not a positive thing, DeWitt says.

A similar warning sign comes when you try to obtain a new loan or finance additional equipment. If you can’t get the same interest rate as your existing debt – or if you can’t get financing at all – that’s a clear indication of a problem, Hoyt notes.

Trucks parked in the yard should be a wake-up call. If you can’t fill those seats, it suggests you aren’t getting a sufficient rate to pay drivers what you need to keep them, Hoyt says.

On occasion, your own thoughts might deliver a warning to you. “One warning sign is the temptation to miss payroll tax deposits,” DeWitt says. If you are even thinking about that, it shows that you are in some trouble. “There’s not a worse loan shark than Uncle Sam,” DeWitt notes, adding that owners’ personal assets are at stake.

Sending out an SOS
If you are hearing warning signs, it’s critical to act before it’s too late. If you wait until something truly dramatic happens – the bank calling your loan, for example – you might not have any options but liquidation. It won’t get any easier. The longer a deteriorating financial situation drags out, the more drastic and painful a solution becomes.

“[The owner] is in denial, and he stays in denial,” Taylor says. “It may be that the pain that he is going to endure to fix the situation is more than he can bear.” It could mean firing or demoting his own family member who isn’t qualified or eliminating an account the owner has had since he started the business.

“The first thing you have to do is get ownership of the problem,” says DeWitt. “Let’s quit blaming someone else. Let’s accept some of the blame. The truth of it is that it’s not the economy’s fault. It’s not fuel prices’ fault. It’s not your drivers’ fault. It’s not your shippers’ fault. It’s your fault.”

Getting past the notion that your troubles are someone else’s fault is a huge step, DeWitt says. “I may spend half a year getting a business owner to accept that. Sadly this often comes only when it gets to the breaking point and there’s nowhere to go for relief.”

It’s sadder still because in many cases, outside professional help really wouldn’t be necessary if the owner had acted earlier. The solutions would be fairly evident to an experienced trucking company owner if he just committed to looking for them.

“Often, when an owner realizes he has to intervene, he does a pretty good job himself,” Freeman says. “But too often managers look at these numbers deteriorate for several quarters in a row and do nothing.”

In the end, the real benefit of going outside for management help is that you get someone who can assess the situation rationally – without the baggage and emotional trauma associated with the decisions, Freeman says.

Short of hiring a consultant, you might consider an advisory board, Freeman says. Some companies pull together local business people to review their numbers and provide frank advice. It’s an inexpensive way to get an independent take on your situation.

You could achieve the same goal with a board of directors, but DeWitt notes that there are drawbacks to a formal board. Unless you obtain special liability insurance, a board member will bear some liability, so it may be difficult to find willing directors, he says.

Moreover, if you establish a board that has members other than owners, there is a risk – remote as it may be – that you could lose control of the company.

If you see the need for a trucking consultant, the best places to go for referrals are friends at state and national trucking associations and industry colleagues you can trust to keep the matter confidential. In some cases, however, your trucking operation may be sound and you really just need help with cash management. In those situations, a local certified public accountant or financial adviser probably can help.

If the situation is truly dire, you could also retain a professional turnaround specialist. You can find a list at the Turnaround Management Association’s website (www.turnaround.org). Generally speaking, someone like that will be too expensive for a carrier that doesn’t have a few hundred power units.

In addition, there doesn’t appear to be many turnaround professionals specializing in trucking. Hoyt attributes this to a harsh reality. “Most trucking companies can’t be turned around,” he says. “Usually they are sold off in pieces or liquidated.” That’s all the more reason why you must make the tough decisions when they will still mean something.

Executing a hard turn
Once you get to the point of action – either alone or with outside help – you have one factor in your favor: your business partners generally have a vested interest in seeing you recover.

“Most lenders want you to make it, so they are willing to work with you,” says Bell. “If you can put together a cash flow plan and look at areas where you can improve the utilization of your equipment, 85 percent of the time they will give you a chance.” If lenders or vendors don’t see a plan, however, they will try to cut their losses and push you to sell the company – if there’s anything worth selling and time to do it – or liquidate assets.

In situations where the carrier’s financial position is not hopeless, the solution usually lies in downsizing. “We’re going to take a look at the freight network,” Taylor says. “What you’ll find in many trucking companies is that part of it is good. The question is whether the rest of the company be reorganized around that good part.”

Taylor says this solution often eludes many owners. “They look at the company as a whole, not as defined business segments.”

“Most of these guys are afraid to shrink,” says Hoyt. The solution usually lies in focusing on the component of the revenue base that is sizeable and profitable. Then, Hoyt says, when you do shrink, keep the best – the best drivers, the best equipment, the best customers and the best lanes.

Often, trucking companies in trouble have grown by acquisition, Hoyt says. “Get out of lanes that don’t have density. Get a better yield.” That’s an area where many trucking company owners need outside help, Hoyt notes. That’s because lane profitability analysis isn’t easy.

Cutting out the unprofitable parts of the operation will help you get stronger, but it doesn’t necessarily get you out of the near-term crisis. The immediate steps are logical and are mostly centered on conserving cash. Try to get vendors to agree to longer payment terms temporarily. Attempt to renegotiate with lenders by financing payments you have missed or are about to miss. That’s expensive, but it buys you needed cash relief.

And you have to get control over all spending. “What needs to be done is that the owner needs to take over the checkbook,” Taylor says. “Take everybody off check-signing authority. You will be surprised what happens.”

Even with these steps, the prospects for a carrier – especially a smaller one – aren’t good if the owner lets the situation deteriorate too long. Outcomes other than sale, merger or liquidation are the exception, not the norm.

Resources: The Small Carrier University series of business management manuals includes advice for carriers on steering clear of – and out of – financial problems. For the text of these manuals – especially How to Manage Cash Flow and How to Use Financial Statements – visit www.smallcarrieruniversity.com.