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The keys to profitability in the trucking industry may seem simple and straightforward. Like any other business, trucking companies must pull in enough income to meet expenses with a profit margin left over. However, fluctuating fuel prices and other costs of doing business can significantly impact the profitability of trucking operations. Regulatory requirements can also cut into profit margins and create difficulties for some companies. Add in the potential for unpaid invoices and delays in payment, and the profitability of any trucking company can decrease significantly.
Planning for profits
In order to avoid these pitfalls, trucking companies must implement a standard set of procedures for pricing their services. Each assignment should be analyzed to assess the likely costs and length of time required for completion. A conservative approach is usually best when determining the right cost basis for a particular job; unexpected expenses should be factored into the profit margin to ensure the company's liquidity even if the worst should occur. Companies should include these elements when considering what to charge for a particular trucking assignment:
- Costs of fuel and labor
- Regular scheduled vehicle maintenance
- License fees
- Administrative costs
- Mortgage, lease or rental costs for office space
- Insurance and liability expenses
- Monthly truck payments
While costs of fuel and labor should be considered in their entirety for each job, the other costs can be prorated for all trucking assignments accepted by the company.
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Managing assignments for maximum profitability
In some cases, drivers may be able to pick up a load of freight near the delivery destination for transport back to the home office or a nearby location. This can optimize profits and ensure that the company is running at full efficiency. Empty trucks generate no revenues; as a result, companies may want to offer lower costs for trucking assignments that can easily be combined with return-trip hauling jobs. Alternatively, companies with relatively low profit margins should charge more for jobs that have no corresponding return trip assignment to ensure cost-efficient use of company resources.
Cash flow and payments
Another threat to profitability may not be as obvious but can have an equally significant impact on overall company revenues. In some cases, trucking firms may have difficulty in obtaining the payments owed on jobs they have already performed for their customers. Delays in payment can cause serious cash flow difficulties for trucking companies who depend on revenues from their shipping jobs to fund their ongoing operations. Other shippers may not be willing or able to pay for the services they have already received from the trucking firm. Especially when taking on new clients, trucking companies must determine the creditworthiness and risk element of each new customer before accepting assignments from these businesses.
The case for freight factoring in trucking
One way to avoid these financial risks is by enlisting the help of a freight factoring company. Factoring companies for trucking firms provide an array of financial tools and packages designed to help them manage cash flows and ensure payment for the services they provide. Freight factoring typically includes some or all of the following services:
- Credit checks for prospective customers of the trucking company – These in-depth evaluations of the customer's ability to pay and past payment history can help trucking companies avoid bad financial risks and the losses that may result.
- Short-term loans to bridge the gap between delivery of services and payment – For many trucking firms, these short-term financial arrangements can provide much-needed cash in hand to manage ongoing expenses during the period between the shipping job and the time that payment is received by the company.
- Outright purchase of freight invoices – Depending on the level of risk and the size of the invoice, many factoring companies for trucking will purchase the invoices due on completed assignments. This typically requires a minimal discount in order to remain profitable for the freight factoring firm, but these arrangements provide much needed financial flexibility for the trucking company.
Trucking companies typically pay only for the services they receive and are under no obligation to sell their freight invoices or to obtain short-term loans. As a result, these arrangements typically entail no added risk to profitability for the trucking companies who choose to take advantage of them.
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The logistics of profitability
Larger shipping companies often choose to enlist the services of freight factoring companies for logistics agencies, as these financial experts can often save valuable time and money for corporate trucking and shipping concerns. While the same concerns about cash flow and nonpayment may not loom so large for these shipping companies, the value of financial flexibility remains an important consideration even at the highest levels of the corporate ladder. The financial vetting performed by these factoring companies for logistics agencies also provides an added level of security on a large scale and can be a significant factor in profit levels for corporate shippers.
For start-up trucking companies, the role of freight factoring is even more critical in establishing financial stability. The loans and purchase agreements available from these factoring companies can provide real assistance in managing short-term cash flow problems and remaining solvent throughout the first years of trucking operations. The financial choices made during this defining period can determine the success or failure of the company, so enlisting the help of the risk management professionals in the freight factoring business can be a positive decision for the future of the fledgling company.
Achieving profitability in the trucking and shipping industries is not a matter of luck. Establishing the right pricing points and policies can be a critical element in the success of these enterprises. Maintaining compliance with all regulations and practicing conservative financial strategies can also be of assistance in ensuring adequate revenues. For many companies, however, the difference between making a profit and barely scraping by is the result of freight factoring services. These valuable partners provide the financial information and flexibility trucking and shipping concerns require to survive and thrive, even in the most challenging economic conditions.
1st Commercial Credit is a factoring company that offers freight factoring for the transportation industry. Services may include but are not limited to trucking, air freight, local delivery and freight brokers in the USA, Canada and the United Kingdom.
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