TRANSPORT INDUSTRY PROFILE
The Road to Cash Flow Positive
Every industry in the economy requires funding; it's just a matter of getting the appropriate funding for that particular issue and industry.
In today’s industry profile, we talk about the transport industry as it has a number of unique characteristics in regards to funding requirements.
Initially businesses in the transport industry require funding in order to buy the fixed assets. These fixed assets include the truck and invariably the trailer that is used to deliver services. Depending on the type of transport business that you operate, you may have a truck including the tray or other load combinations like B-double.
BUYING THE ASSETS
Transport assets can cost hundreds of thousands of dollars. So often these units despite the ability to depreciate the assets from an accounting point of view, require funding. Owner operator business cannot usually afford the large amount of money or capex (capital expenditure). Funds are mostly required for working capital.
Based on the operating life of the asset, it’s not worth using cash flow to buy a fixed asset. Many owners purchase the asset with either a chattel mortgage or leasing arrangements. Both these arrangements come with a variety of tax or accountant benefits, in terms of depreciation or deductibility of interest; principal or rental as well as balance sheet impacts. So if you're reading this talk to your Accountant for more details.
WORKING THE ASSETS HARD
Once a business owner has the units it’s often a matter of having the transport work, jobs or runs with customers to utilise those assets to their full capacity. This is a separate challenge for the business owner.
A client once told me, “it’s great to buy these beautiful rigs” and have them branded, but “it’s always a problem when you see them in the yard”. When you see a truck in the yard this either means it’s broken down or doesn’t have a job to go to.
For a business owner this is a problem as the asset is not generating any revenue.
REPAIRS AND MAINTENANCE
Often, but not always if your truck is in the yard, needs repairs. The business owner needs to find cash quickly in order to repair the truck and get it back on the road. The repair could be expensive such as a changing motor or a change in transmission unit. Another client once told me they used to swap motors, transmission and units around between the trucks depending on the haulage capacity in order to basically keep the best trucks running and generating revenue.
Being a financier I asked both of these customers
“ how do you cash flow your business ?”
The reply I got was not surprising, “I wait for my customers to pay as the bank wouldn’t give me enough money to run my business”.
I said so how much does the bank give you ? “ Well the overdraft is $100,000 secured by my family home.”
So I said how much your debtors were and the reply was “$500,000”.
“Wow that must be difficult” I said to be running $500,000 of accounts receivable debt on only $100,000 overdraft”
The conversation continued around the struggles this owner operator had with his cash flow and why he had to scrimp and save with the trucks in order to keep them on the road and make finance payments.
The client also told me that he was struggling with collecting as he was always on the road driving in the yard with his drivers.This only further expands the cash flow problem
THE CASH FLOW ANSWER
So when I noted down a list of issues the client was dealing with I said “you know there’s an answer to solve the cash issue in your business”
The transport business owner said to me “if I knew the answer I would’ve done it yesterday.”
So we discussed the answer “Invoice Finance or factoring finance” in some detail.
The business owner didn’t know much about Invoice Finance so we discussed how the process works and importantly why the process works so well. They realised that if he got 80% payment on invoices upfront when he raised his invoice and the other 20% of the invoice value less a small fee when the customer paid the invoice his cash flow would always be positive.
So the business owner then said look I need to think about this and what it will do for my business.
THE SOLUTION – ACT NOW
The business owner realised that if he had enough money in the business and he could be paid quicker on his customers invoices. He could then pay wages weekly without the struggle, keep up with his arrangement with the tax office, and make direct debit finance payments on time.
In fact there were so many advantages to having a positive cash flow because invoice finance or factoring would solve many issues not just the money problems in the business.
The business owner also realised that whilst he was making money he could never see it in the bank account. This was obvious as the business owner was managing the accounts payable every day and taking phone calls from suppliers demanding payment.
So whilst we have talked about transport it’s important to make sure that all the components of that business are in place and the finance is critical to everything that happens. Without money or cash the business is going no-where fast.
THE CASH FLOW SUCCESS
This story didn’t happen yesterday, it happened 15 years ago. This client once they had a positive cash flow was able to
- grow their business successfully
- take on new contracts with confidence
- establish better arrangements with their suppliers including fuel maintenance and tyre suppliers.
The client John and I still talk regularly. Since we first met he has used debtor finance to provide the business working and he no longer provides property security (the family home) to finance his business. Importantly due to having a profitable business with a positive cash flow he is able to continue growing his business and improve his financial position.
So if you’re in the transport business and looking for a positive cash flow maybe just like using finance for your fixed assets, you should be financing your debtors as well.
Invoice finance or factoring also known as debtors finance is a simple financial service that provides funding on invoices but also provides credit support to clients when needed. In reality often the proof is in the pudding and whilst information is provided at the start the real benefits to the client business of invoice finance are only realised when the facility is in place and operating efficiently. For a business owner the benefits will be realised every time we fund against your invoices.
If you would like to talk to a Cashflow Finance specialist about finding your debtors with Invoice Finance contact us on 1800 FUNDIT that’s 1800 386 348.