How to Fix Your Transport Company’s Cash Flow Problems

But for transportation companies, a freight recession has led to specific problems that have impacted cash flow management. 

According to data from Freightwaves, the Outbound Tender Volume Index (OTVI), which tracks freight volumes, has been up 16% since 2019. While that might look promising on the surface, further investigation is needed. The Outbound Tender Rejection Index (OTRI) looks at how many truckload orders have been rejected and how full a truckload is at any given time. The current number of 3.5% is historically low, suggesting overcapacity and overstocking are two of many problems that are causing cash flow issues.

And cash flow is crucial for maintaining revenue, increasing margins, paying drivers and serving customers to the best of your ability. When things go wrong, it leads to a breaking of customer and staff trust, revenue loss, a damaged credit score and possible bankruptcy. In this article, I’ll explore how to spot the signs of cash flow problems and what you can do to fix them. 

One of the most common reasons why transport companies experience cash flow issues is because you aren’t charging enough per mile to cover expenses. Usually, this happens because you haven’t correctly calculated your cost per mile. 

For reference, the average cost per mile according to the American Transportation Research Institute was $1.69 as of 2018. And that figure considers fuel, lease and purchase payments, repair and maintenance, truck insurance premiums and tires. As of August 2023, the average cost per mile for dry van trucks is $2.07 and for flatbed trucks, it’s $2.49. 

Without being aware of these figures, you’re more likely to underbid for loads and shoot yourself in the foot. 

Create an accurate pricing strategy that’s based on growing your business. Start by figuring out a cost per mile that’s enough to cover your expenses and projected projects. You can do that by looking at your current expenses and forecast how many miles you plan to drive over the year. Then divide the expenses and profits by the miles. 

Another mistake to avoid is to be overly reliant on load boards instead of working directly with shippers. Load boards/freight matching services connect shippers and carriers together in an online marketplace format. Truck owner-operators and shippers can post about what equipment needs to be transported and the availability of freights.

And while load boards have their place, overusing them will only squeeze your profit margins in the long run. 

Focus your efforts on getting high-quality transport contracts and building a strong relationship with your shippers. To do that, here’s a few things you can try.

• Consider who your ideal shipping client is and their traits: Are they an established broker? Do they pay well? Would they use your services regularly? Are they reasonable in terms of delivery times and do they understand what a quality service means?

• Go where your clients are by joining the right associations: For instance, if you’re hauling reefer loads then you’ll want to go to metro produce markets or visit wholesalers.

• Refine your selling skills and stand out from competitors: When talking to prospective clients, come from a place of understanding that they need reliable and quick drivers. Set up meetings either by phone calls or by sending letters. Invest in marketing strategies that attract your customers to you.

• Develop contacts with the government: Register for the System for Award Management (SAM). This database lists federal contacts. 

The average invoice window for shipper and freight broker payments is 30 - 60 days. In this time, delays can happen and trucking companies face cash flow problems because they can’t wait that long. Expenses need to be paid and without the cash flow to do that, they miss out on these payments and debt builds up. 

First, you can try negotiating payment terms with shippers and making a case for why you need faster payments. You’ll want to lean into the quality of your service here. Keep track of your deliveries and the outcomes of those jobs. How did you create better results for your clients? If you can show hard evidence of that, shippers are going to be more open to having negotiation conversations.

The second thing is finding better, faster-paying clients, which is linked to our second point about investing your time into high-quality trucking contracts. A third option is to finance invoices using freight factoring. This works by partnering with a finance business that pays your invoices from creditworthy shippers. You’ll have advanced payments, though be aware that freight financing brokers charge based on the finance volume and the time taken for shippers to pay. 

Transport companies also have cash flow problems from not having the right fuel purchasing strategy. A common mistake is overpaying for diesel, which eats into profits. A usual workaround to this is trying to buy gas in locations that have the cheapest pump price, but this doesn’t guarantee you cost-effective fuel.

Start by researching IFTA regulations, which govern fuel purchases, tax deductions and refunds. One of the most important factors to be aware of is that it’s not about pump price, it’s pre-tax price that will save you money. 

What does this look like? Well, buying diesel means you have to pay fuel taxes to every jurisdiction you drive through no matter where you purchased it. So, even if one state looks like it has a cheaper pump price than another, you need to think in terms of paying the lowest base price for the fuel. Once you apply IFTA calculations, you can add the correct taxes after. 

Quick growth sounds like a great position to be in. But if there’s no strategy behind it, then chaos will soon take over and you won’t be able to manage it. The next thing you know you’re scrambling to meet missed deadlines, trying to repair customer trust, recoup lost profits and sliding back down the hill.

Go back to the basics with cash flow forecasting and determine what kind of forecasting model best suits your growth plans. Be specific with the tasks that require your time and the tasks that can be automated for improving cash flow and revenue growth. For example, automating your cash collection process means you won’t have to worry about chasing late payments.

This is different from the amount of effort needed to vet new customers and suppliers. You’ll want to apply a mixture of manual and automated processes. This means speaking directly to the decision-makers at these businesses and getting a feel for their teams.

This also means running thorough credit checks on potential customers and existing customers to gauge their financial health. You shouldn’t just do this at the start of your relationship. Your team should be reviewing existing customers’ credit reports regularly to see if circumstances have changed, if their sales have declined and if they have fallen behind or become delinquent with paying their bills.  assess financial and compliance history so everything is above board and you aren’t going to be burnt later on.   

Your company needs to be insured. Otherwise, you’ll end up operating illegally. It’s a mistake to go for the least amount of insurance possible to cut costs. You’ll want to be covered against all risks that could damage your cash flow and reputation and be ‘made whole’ if an incident happens. What this means is you’ll be able to operate as if the incident didn’t occur. Yet, high insurance premiums are making it increasingly difficult for transport companies to pay for the right insurance. 

First, you’ll need to review all insurance options that apply to your industry. This might include primary and vehicle liability, motor truck cargo, medical payments, uninsured motorists, reefer breakdown and non-trucking liability. And whether you’re a new company or have been established for years and are planning to buy insurance, it’s always better to be safe (i.e. insured) than sorry.

Here are some questions I’d recommend you ask yourself before signing up for insurance.

• What equipment do you need to support your industry?
• What lanes are you planning to drive?
• What are your rates per mile?
• What are your costs per mile?
• What’s your plan for loads and contracts?

There’s no one-size-fits-all approach to managing this. But you can work with agents who’ll make it easier to find a cost-effective solution. Plus, vet your drivers and make sure they are clear of any criminal records because that’s going to make the insurance less expensive overall.

Unexpected maintenance and equipment costs are two of the biggest killers of cash flow. If one or more trucks break down, then the cost of paying for repairs and sourcing the tools to do so has a compounding effect on your business. You’ve got one less asset out on the road earning revenue and it’s costing you time and money to fix.

The most immediate thing you can do is carry out regular maintenance on your equipment and vehicles. This involves checking the oil, keeping the exterior clean, rotating tires, inspecting brakes, checking air filters, examining the gearbox and so on. 

But even with the best of intentions, breakdowns happen. And the only way to afford those costs and repairs is to have a cash reserve. 

This final section sums up everything about cash flow problems in your business. Without having the cash to solve any of the issues we’ve talked about, you’re going to find it hard to pay for ongoing operations and will likely end up becoming delinquent on payments to your suppliers. Maintaining a reserve cash fund is how you’re going to weather the storm.

When costs are piling up, there are a few things you can try. One method is to sell any assets you don’t need or to sell a portion of the business to stave off debt. Yellow Corps is a good example of this. The trucking company filed for Chapter 11 bankruptcy protection in August 2023 with an expected asset sale of $1.4 billion. 

Another method is to use your working capital more smartly. An effective working capital management strategy will help you arrange your assets, the data that’s working and the data that isn’t and problems and gaps to solve. The insights you gather may cover insufficient cash flow forecasting, overstocking and inadequate credit policies. 

Finally, Lina Chindamo, Director of Enterprise Accounts at Creditsafe has some additional solutions to share. “Hire a seasoned credit risk team to collect your receivables. This will not only improve your cash flow, but they can take on the responsibility of authorizing and approving credit (sell to companies that will pay you). I’d also suggest that transport companies use digital credit risk tools to make the credit decision process easier, quicker and more reliable.”

Lina also recommends the following:

• Perform route calculations to improve margins.
• Deal directly with shippers or trusted brokers. But beware of double brokering. This increases the likelihood of theft and fraud, which increases the likelihood of not getting paid.
• Perform your own checks for loads on load boards and don’t rely on data posted.