How trucking companies go bankrupt and how you can avoid it
In the fast-paced world of trucking, success isn't guaranteed. Most recently, trucking giant Yellow fell to bankruptcy, putting about 30,000 people out of jobs. If a trucking company that had been around for nearly 100 years faced challenges that put them to bankruptcy, then it’s inevitable that it could happen to just about any. Whether you're a seasoned trucking professional or just starting out, understanding the pitfalls that lead to these troubles and how you can avoid them is crucial for sustaining a healthy business.
5 reasons trucking companies go bankrupt
1. Losing sight of your costs
The first mistake trucking companies make is failing to create a plan. A proper business plan with financial budgeting and forecasting is crucial to keep your spending on track – the goal is to ensure your operating ratio stays under 100.
When starting out, you’ll also want to consider initial overhead costs that come with the business. The cost of purchasing a truck today, brand new, can range from $115K-$160K, not including other associated expenses like fuel & maintenance. If you’re not careful, these can start to eat away at your profits. Lastly, when costs start to pour in and business isn’t booming, your cash flow becomes limited. It’s a chain reaction that ultimately causes your business to succumb to an overwhelming amount of expenses.
2. Failing to invest in technology
Neglecting to build a tech stack for your company can put your business behind the competition and lead to operational inefficiencies. There are various software tools that trucking companies can benefit from integrating into their business including a CRM (Customer Relationship Management software), a TMS (Transportation Management System), accounting software and ELD solutions. There are evident advantages from investing in these technology advancements which include:
Operational Efficiency: Technology automates and streamlines operations, reducing manual effort and costs.
Improved Customer Service: Tech tools enhance the customer experience through transparency and better communication.
Data-Driven Decision Making: Data analysis helps optimize operations and identify areas for improvement.
Cost Reduction: Technology lowers costs by optimizing fuel usage, reducing maintenance expenses, and increasing efficiency.
Risk Mitigation: Real-time monitoring and alerts help mitigate risks associated with theft, accidents, and delays
3. Unprepared for economic downturns
Like many industries, the trucking industry can be deeply impacted by economic recessions, as it serves as a barometer of economic health. During downturns, consumers spend less, and manufacturing activity slows down, leading to decreased demand for freight services. This, in turn, can deeply impact a trucking company, depending on the sectors they service. It can place immense financial strain on trucking companies, often resulting in layoffs, fleet downsizing, and heightened competition for fewer shipments. However, the best trucking companies don’t just weather the storm of a recession, they can thrive in it.
4. Not building a moat around your revenue sources
Many trucking companies don’t see their impending bankruptcy, and some of the largest reasons is that their current revenue streams are not defensible. One of the easiest pitfalls is not having a diversified customer set. If more than 50% of your revenue comes from one customer, that’s an easy signal that your revenue is more at risk than you think. It’s easy to settle in with the customer base you already have, but keeping a muscle of being able to win new customers or add new lines of revenue, can be a factor of life or death for your business.
5. Inability to retain drivers
Between the gruelling schedules, time away from home, and low pay, driver shortages are no surprise in this industry. Failing to offer competitive compensation, benefits, and a driver-centric environment results in high turnover. Ultimately, this can harm service quality, damage client relationships and weaken your market competitiveness, which puts your business’ reputation on the line.
So, how can you avoid this?
In knowing what runs trucking companies out of business, how can you proactively prepare your business to avoid it?
1. Know your operating numbers
Maximizing operational efficiency is vital for your trucking business. Some key metrics to keep track of consistently include fuel costs, cost-per-mile, operating ratio, and insurance expenses.
Fuel Costs: Fuel efficiency is critical due to its impact on expenses. Monitor your fuel consumption using telematics, tracking systems, and driver behaviour insights. Regular, preventative maintenance of your fleets will also help keep these costs down, in addition to training your drivers in fuel-efficient practices. Lastly, explore fuel cards or fleet programs for discounts and compare prices at different stations along routes.
Cost-Per-Mile: Calculating your cost-per-mile accurately will help you price services in order to enhance profitability. Consider fixed (insurance, lease) and variable (fuel, maintenance, tolls) expenses. And be sure to update this regularly based on total fleet mileage and expense changes.
Operating Ratio: As mentioned earlier, your operating ratio reflects your operational efficiency and profitability. Calculate this using the formula: [Operating Expenses / Total Revenue] x 100.
Remember, lower ratios indicate better efficiency. Regularly track and reduce high costs while focusing on revenue growth.
Insurance Costs: Insurance is essential, but managing costs is key. In order to do this, seek competitive rates by obtaining multiple quotes. Implement safety protocols and driver training to reduce your risk of accidents. And lastly, maintain a good claims history and periodically review coverage to ensure adequacy.
2. Adopt a modern technology stack
While manual record-keeping and older systems can feel comfortable, they can often lead to errors and inconsistencies in tracking your expenses. Not to mention, inefficiencies around route planning and scheduling. Many companies struggle to effectively monitor and analyze their expenses, making it easy for costs to spiral out of control. Adopting a modern technology stack can be a great way to rethink the business’s relationship with technology.
Technology investments, like a Transportation Management System (TMS), can help your business streamline operations, optimize your routes, manage shipments, and track your finances. With a TMS, you’re equipped with expense tracking software that can help track financial performance time over time. And with this data, you gain insights that can inform decision-making, enhance efficiency, and improve your overall financial management.
3. Expand your client base
Diversifying your company's client base is paramount for long-term success. Start by conducting in-depth market research and analysis to help you identify opportunities for expansion and services that are in high-demand. From here, you can look for ways to expand your service offerings, such as specialized hauling and last-mile delivery, which helps to expand the potential client pool.
In addition to this, networking at industry events, creating an online marketing presence, and forging collaborative partnerships opens doors to new opportunities. Embracing diversification not only enhances revenue streams but also strengthens your company's resilience in the competitive landscape.
4. Create a culture worth staying for
Creating a workplace culture that centers around values and people is pivotal in retaining your drivers and staff. By prioritizing core values such as respect, safety, and open communication, companies foster an environment where their employees feel valued and respected. Recognizing the hard work and dedication of drivers and staff through incentives and appreciation initiatives can boost morale and loyalty. Providing opportunities for professional growth and training not only enhances skills but also shows a commitment to employees' long-term success. In a culture that places people at its core, employees are more likely to remain engaged, committed, and motivated, reducing turnover and contributing to the overall success of your trucking company.
The bottom line
Staying in business in the economic climate of the trucking industry requires strategic thinking and a commitment to sound financial practices. By recognizing the common pitfalls that lead to bankruptcy and implementing proactive measures, trucking companies can safeguard their operations and thrive, even during turbulent times. Remember, success in trucking isn't just about moving goods from point A to B— it's about managing your business's health and finances every mile of the journey.