Forecasting for cash? What does that mean? I’ve never built a forecast before and I’ve done quite well, so why do I need one know, you ask?
These are the basic reactions when anyone suggests a change in your business operation, but leading experts on small businesses all recommend building forecasts. Large businesses do this not only on a yearly basis, but quarterly, monthly and even weekly in some cases.
Why do they do this? It comes down to the ability to more closely manage your business, and most importantly, the utilization of cash within. By keeping close tabs on where you are spending your money, and also what money you expect to receive, it will help you better manage the available cash you have on hand and to be prepared for when that cash flow hits a rough spot.
Let’s explain, and we’ll start with why putting together a forecast is a good idea.
“With regards to an optimal forecasting period, the industry standard is 13 weeks, the number of weeks in a fiscal quarter,” wrote Marty Mooney, in a blog posting for Toptal. “Ideally, a company should understand how revenues and costs will be incurred in this time frame. If you only project out four to eight weeks, it will be difficult to effectively react to liquidity issues.”
Mooney does suggest doing weekly forecasting, but for many smaller trucking companies and owner-operators, that task could take away from revenue-generating loads. However, doing a quarterly forecast is worth the time, and here’s why.
It forces you to continually look at your finances on a cash basis. Do you have a shipper that isn’t paying quickly? Or maintenance repairs that are mounting? Or a truck that isn’t producing enough revenue? It’s easy to lose track of these things when you are busy running loads yourself and suddenly, you’ve gone two months without any payments coming in. Sitting down at least once a quarter (or a month or weekly if possible) to go through your finances will prevent small cash flow problems from becoming bigger cash flow problems.
Other benefits of reviewing your financials regularly and forecasting the next quarter is because it can help you take advantage of opportunities and allow for possible expansion. Is there a new shipper in the area opening up in two months and you’ve gotten the business? That’s great, but before you can haul for them – and before any money comes in on those loads – you need to buy a truck and/or trailer and hire a driver. Those costs will have to come in a form of a loan if you if you haven’t correctly forecast and managed expenses to that point.
Also, effectively managing the flow of cash through your business can minimize the amount of money you need to borrow and the associated finance costs to do so. If you have good cash flow, a bank will provide better lending terms.
So, if you’ve decided that building a forecast for your business is the right step, how do you get started?
Entrepreneur.com has some tips on how to build a forecast, and it starts not with the revenue you expect to make, as many believe, but rather with the expenses you pay out. Estimate as best you can both fixed costs and variable costs. Fixed costs are things like rent, truck loans, phones/computers/internet, salaries and utility costs. Variable costs include things like fuel, materials and supplies, and labor costs not associated with all loads (such as lumper fees).
The publication says to do two forecasts – a best case and a worst case. The key here for trucking operations is to estimate load revenue. Because you only have limited control over rates, this can be difficult. If you know how to create a break-even point for each truck you own, then developing a hauling rate range becomes possible and gives you both conservative and aggressive rates to work with in your forecast. (You can read more about creating a hauling rate range here).
When building your forecast, you will want to consider how many days will you be on the road during this time period? How much revenue does the truck make each day it is on the road? How many miles do you drive and how much does it cost to operate your truck.
Each operation is different, but in 2017, the American Transportation Research Institute (ATRI) did a survey on the Operational Costs of Trucking based on per mile traveled. Here is what it found (keep in mind that many of these numbers are based on larger fleets, so the costs may be a little higher for smaller operations, but they provide a starting point):
Fuel costs: $0.336
Truck/trailer lease or purchase payments: $0.255
Repair and maintenance: $0.166
Truck insurance premiums: $0.075
Permits and licenses: $0.022
The organization also found that it costs carriers $0.523 per mile for driver wages and $0.155 for driver benefits. In total, ATRI said that for 2016, the operational cost per mile per truck was $1.592.
Finally, when building a forecast, it’s important to keep in mind your customers’ business. If you can foresee a potential slowdown for one of your main shippers, you can lower the forecast or look for new avenues to fill in freight gaps before they appear. Your forecast is as much about knowing about your business as it is knowing about your customers’ business.
They say that trucking is a relationship business, and your business forecast needs to reflect that. Besides your customers, you need to look to larger economic trends that may impact your business. Do you haul retail freight? How’s the retail market? How about auto parts? Are car sales falling? Creating a forecast in a vacuum is the equivalent of not having a forecast at all. It won’t do you any good. But, spending time to build a forecast can help you better manage your cash, your business opportunities, and your future.