Cash flow 101


A great many trucking executives know how to run a fleet and do the hundred other things required to run a company. But it wouldn’t surprise me to learn that only a small portion of these people truly understand cash flow and breakeven. So let’s talk Cash flow 101.

How do you get a handle on cash flow, and more important, how can you tell what additional sales you need to get your cash flow to break even?

The typical monthly financial statements don’t usually help very much. Net income and cash flow are almost never the same number – not even close. The reason is that the depreciation expense on a P&L has nothing to do with debt service.

What you really need is a “Cash Flow Statement,” but most companies don’t prepare them monthly. More often, they are buried obscurely in your annual financial statements – months after the end of the year and too late to do you any good. To get a very rough idea of your monthly cash flow and breakeven, however, take the following steps.

  1. Take your annual net income (or loss) and add back depreciation and interest. For example, if you have $10 million in sales and $9.75 million in expenses, you would have $250,000 in annual profits. Adding back depreciation of $3.35 million and interest of $600,000, you might have indicated cash flow of $4.2 million annually.
  2. Take this number and divide by 12 for a monthly average of cash flow generated by your operations. In our example, $4.2 million annually is $350,000 monthly. This of course excludes changes in your cash flow for prepaids, accounts receivable and payable, and dividends to owners.
  3. Next, determine your monthly debt service. This is the sum total of your entire principal and interest monthly payments. But it excludes things like monthly rent or leased equipment that is treated as an operating lease or trac lease. These items are deducted from your P&L in lines other than depreciation and interest. For our example, let’s assume our debt service is $375,000 monthly.
  4. We are short of cash flow breakeven by $25,000 monthly ($375,000 monthly debt service less the $350,000 average cash flow.)

How much additional business do we need to break even? There are three ways to look at this: more customers, more loads or higher rates. For simplicity sake, let’s focus on more loads or higher rates.

To make up $25,000 per month in this sample 100-truck company, you have to know what your variable costs would be. For company trucks, these are driver pay and fuel, and let’s assume that is 50 percent. Thus, we would need $50,000 more in revenue per month to add $25,000 in cash flow. An owner-operator fleet likely would need $100,000 monthly to get a $25,000 impact after paying drivers.

If your trucks average $500 per haul, to get $50,000 more, that’s 100 more loads per month – or an average of one load per truck per month – short of breakeven.

How could this carrier make up the shortfall through rate increases? The company has $10 million in business and averages $500 revenue per load. That’s 20,000 hauls per year, or 1,667 per month on average. To get $50,000 more revenue per month, the carrier would need to charge, on average, $30 more per load, or work to average $530 per haul.

Could you squeeze in one more load per month per truck or get $30 more per load, on average? Most companies could probably get there through a combination of those two strategies.

There are of course cost-cutting measures and many other ways to look at breaking even. But I have found that when you do understand the fundamentals of cash flow and can translate them into daily goals for your dispatchers and other people, winning at the cash flow game becomes a bit easier.

Small Carrier University, a joint effort of CCJ and the Truckload Carriers Association, offers “How to Manage Cash Flow,” available online at this site.