Cash Flow, Cash Flow, Cash Flow
Updated: Dec 21, 2021
The late Lord Harold Samuel, a British real estate tycoon, was credited with the mantra: ‘There are three things that matter in property: location, location, location.”
If Lord Samuel had been in the trucking industry rather than real estate his expression could possibly have been: “When it comes to a successful trucking company there are three things: cash flow, cash flow, cash flow.”
One of the biggest reasons trucking companies fail is because of cash flow, or more to the point, the lack of it, but what is cash flow? If asked your CPA can describe cash flow in flowery terms incomprehensible to any layman. Investopedia states “cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow.”
Does that clear it all up for you? No? Me neither!
As far as I am concerned cash flow is the ability, or lack thereof, to pay your current trucking company bills. If bills are paid and there’s still money left over, in my opinion, that’s a positive cash flow.
On the other hand if you don’t have enough money in the bank to cover current bills you have a negative cash flow. Now, that explanation is far more understandable compared to Investopedia’s highfalutin definition don’t you think?
What are the consequences created by poor cash flow? According to a U.S. Bank study, 82 percent of business failures are due to poor cash flow management. Cash flow is critical and a leading cause of stress because it’s the diesel fuel of your business. Without a positive cash flow you can’t make lease or rent payments, meet payroll, pay for fuel or make truck repairs. This could put the brakes on your entire operation.
In most instances a negative or poor cash flow is created because clients are deliberately slow in paying freight bills. You have incurred all the expenses in providing services to the client but now you have to wait on payment. In the meantime you still have your own bills to pay.
Inability to pay bills may be exacerbated if clients have seasonal traffic. During these periods your payables are relatively but receivables may be drastically reduced. Seasonal scenarios can be projected, even though all aspects of your operation are budgeted down to the very last penny, slow paying clients can turn everything upside down.
Cash flow is not equivalent to profits. Profits can be projected on paper but only actually earned after clients pay freights bills. Payment could be 30, 60 or even 90 days after the service has been provided. Twenty per cent of your clients are probably responsible for 80% of your receivables.
If your trucking company is new or in a growth stage access to immediate cash is critical. Even with consistently high sales cash can be stretched very thin at critical times, for instance on pay day for employees.
There’s an obvious gap that needs to be bridged. Several solutions are available to this cash flow gap, one being much faster than others. You could approach your banker for a loan or secure a line of credit. The bank’s process may take weeks to approve or deny. This doesn’t help if your immediate need is to meet payroll in a couple of days.
Comedian Bob Hope said, “A bank is a place that will lend you money if you can prove that you don't need it.” A bank’s attitude certainly lends credence to his quote.
The fastest and easiest solution is to factor your receivables. There are different types of factoring for trucking companies but in each instance you receive immediate cash for receivables. Unlike a bank collateral or credit rating is not required for factoring. As an asset your receivables act as their own collateral.
How would your cash flow improve if all receivables were paid in 24 hours rather than 30, 60 or 90 days in the future?
Factoring is literally your money in your bank account. What a relief!
If cash flow in trucking is as critical as location in real estate factoring your freight bills is by far the fastest and simplest solution.
For more information about factoring for trucking companies, please call us for a free, no obligation discussion about your specific situation. If you prefer please complete and submit the form below.