American Trucking Associations’ seasonally adjusted Truck Tonnage Index rose 0.5 percent to 160.3 in June. This followed a revised 1.5 percent reduction in May. Year-to-date, compared to the same period in 2003, truck tonnage was up 7.2 percent, after increasing just 3.0 percent for all of 2003. “June’s data shows that the trucking industry continues to deliver a robustly growing economy,” says ATA Chief Economist Bob Costello. “Even more impressive than the month-to-month increase is the strength from May 2003.” The baseline year for the index is 1993.
The Freight Transportation Services Index has risen the past four months to a level of 126.1 in May, according to the U.S. Department of Transportation’s Bureau of Transportation Statistics. The May level, which is a record high for the 14-year period covered by the index, was 7.5 percent higher than in May 2003. The baseline year for the experimental index, which was launched in March, is 1996.
Internal Revenue Service issued Revenue Ruling 2004-80, which declares that a truck matching certain specs that can carry cargo on the chassis as well as tow trailers is a tractor for purposes of the retail excise tax imposed by section 4051. The truck can pull trailers exceeding 35 feet with GVW ratings of 20,000. IRS ruled that the vehicle’s physical characteristics, which maximize towing capacity at the expense of carrying capacity, establish that it is designed primarily to tow a vehicle, such as a trailer or semitrailer, rather than to carry cargo on its chassis. For the details of IRS’s ruling, visit this site and search for Rev. Rul. 2004-80.
If you have a typical trucking operation, you probably have plenty of freight. You may even be beating customers off with a stick. Yet despite the brisk business, chances are that the president or chief financial officer is stressed because of weekly cash flow crunches. That situation probably is due to misunderstandings of financing basics that I call “The Immutable Laws of Finance.” If you ignore them or try to bend or break them, you will suffer.
Law No. 1: You can’t always make it up in volume. Trucking operates on razor-thin margins. Taking care of five really good customers and working with them to achieve the right pricing will always beat serving 10 or 20 lousy contracts at rock-bottom pricing.
Law No. 2: You always must have a certain volume. Everyone has quotas to meet, and they generally aren’t set on a whim. You must have a certain number of good customers so that none can dominate you. If you stick with “below breakeven” or a single, dominant customer, bad things happen.
Law No. 3: You must have a down payment. If you never contribute capital up front, you never will get ahead of the game. If you are constantly on razor-thin monthly payment margins, you always will get pneumonia every time a major customer sneezes or the economy dips.
Law No. 4: You must have equity and working capital. To compete effectively, your company must have at least the average equity and working capital of the industry as a whole. If the industry’s average equity is 30 percent of assets and your company has $10 million in assets, you have to put $3 million of equity into your company for every $7 million in debt just to be an average competitor. Get it the old-fashioned way: Earn it. Why not just borrow it? Because …
Law No. 5: Financing always comes at a dear price. Relying on “other people’s money” – whether borrowed from a bank or invested by partners – means ceding control. Remember the golden rule: “He who has the gold makes the rules.”
Law No. 6: Sustainable growth applies to you as well as everyone else. Rapid growth requires cash; it does not produce it quickly. Growth strains the financial and mental resources of your company. Think of it in military terms. If you advance too fast toward enemy lines, you stretch your supply lines and become vulnerable. Likewise, if you already are weak because you have no equity or because you have ignored other Immutable Laws, the percentage of your sustainable growth will get smaller every year.
Law No. 7: Not all customers are good customers. Some customers truly are partners in your business. Others seek any possible advantage and hurt you in the process. Work to get more of the good ones and drop the bad ones. If you can’t bring yourself to say no, you should get out of the business.
Law No. 8: Don’t kid yourself. Look at your management of the business frankly and honestly. Many owners complain that they never get a return on their investment. Then you discover that a spouse and several nonworking children are getting weekly paychecks, paid vacations and company-paid perks like country club memberships. Meanwhile, the company can’t make its payroll deposits.
Law No. 9: Finance stuff properly. Only borrow for items that produce income or appreciate in value. I don’t borrow to purchase clothing, for example, because inevitably I will get a big stain on it. Then the clothing has no value, but I still owe for it. Also, financing terms should match the life of the asset. Finance trucks over 36 or 48 months – never longer and rarely shorter. Buildings require 15 years. Don’t use 30-day money to finance these assets. And don’t try to use long-term debt to purchase short-term needs such as basic net working capital. Read Laws No. 3, 4 and 5 again.
Law No. 10: Planning is not a dirty word. Are you too busy fighting alligators to drain the swamp? Financial trouble is a symptom of poor planning or, more commonly, no planning at all. If you don’t slow down long enough to plan for a solid financial future, you’re going to get what you’ve always been getting.
Those are the rules. If ever you are tempted to break any of them, remember: It’s not just a good idea – it’s the law.
For a primer on debt vs. equity financing, see “Financing Basics” at this site.