In 2020, successful businesses know how to harness financial statement data. But for transport carriers, government deregulation of the industry has made it hard to come by standardized facts and figures for decision making.
Jerry Noonan, CPA and the founder of Carriernet, Carriernet Connect Accounting and Dispatch Software System and Author of “When the Rubber Hits the Road,” says this leads to generating inadequate revenue and inadequate record keeping — two surefire reasons transport businesses fail.
Here, Noonan explains some commonly overlooked areas all carriers should understand before every run.
1. Transport costs are mirrored in and out of any point
In other words, costs to go from point A to point B, and from B back to A are the same, based on fuel, driver salaries, fringe benefits, over the road costs like tools, fixed costs like insurance, licenses, interest depreciation and other fixed costs. A problem arises when a load out doesn’t pay as well as a load in. If a carrier runs empty on the way home, they’ve still got fixed costs to pay — and no revenue to put toward them.
2. Carriers must understand activity in balanced and unbalanced freight markets
A balanced freight market is one where a carrier has a contract in that is as profitable as their load out. In unbalanced markets, rates into or out of the area will be less profitable, sometimes requiring empty miles and more of them, for the carrier who must go elsewhere to pick up a load for the return.
3. Freight cluster areas are unbalanced markets
A freight cluster area is any location where critical masses of economic activity are taking place in a particular field. It is often unbalanced because transport services are needed to bring in raw materials and supplies, but fewer goods are coming out than going in. These areas might yield profitable loads in, but it’s often difficult to generate a profit on the way out because there are fewer goods and more carriers in competition. Further compounding this issue of supply and demand is that brokers in cluster areas have the power to negotiate for the lowest price carrier — creating a “spot market.”
4. Spot markets take advantage of small carriers
Spot markets are places where unbalanced freight transactions are conducted in a reverse auction where one buyer procures transport with multiple transport carrier sellers to bid down freight prices. Brokers treat freight transactions as a commodity to be sold at the lowest price. For carriers without a local connection in these areas, getting out with a profit can be a challenge.
5. Watch out for load boards
Load boards are online spot markets where freight orders for transport services are bought and sold at the lowest per mile price by shippers and brokers. In theory, the system should work for all parties, but they allow brokers to find the lowest priced carrier and drive down prices in unbalanced freight areas.
A final word
The law of averages can’t be beat. Transport carriers who believe they can make up the differences generated by unbalanced markets may run more miles or return empty to an origin point where prices are better. But a review of the principal of mirrored costs shows that this is not a sound strategy. For example, if a carrier’s breakeven point requires an average of $2.50 a mile, a 1,000 mile outbound trip generates $2,500 of revenue. However, if they come back only having yielded $1 per mile or $1,000, and with mirrored costs of $5,000 for the round, they show a loss of $1500 on that run. Over time, these losses cannot be made up by running more miles. It leads to insolvency and potential bankruptcy.
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