Cashf low and the moneN maze: a plain man's gulch
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Having cashflow problems? Prepare to pill them behind you, as lain Sherriff unfolds the mysteries of this vital key to business success
THERE ARE 68,000 operators in the UK with one vehicle, 21,000 with two vehicles, 10,000 with three vehicles, 5,000 with four vehicles and 3,000 with five vehicles. This group has more operators than all other fleet sizes taken together.
Small fleet operators traditionally carry the goods which others do not want and at rates the larger operators would not or need not accept. But the small man also carries the larger operators' excess traffic.
There was a time when the small fleet operator was regarded as an outcast or, in the terms of the early seventies, a "cowboy". Times have changed.
Unless we are to challenge the decisions of the licensing authorities these operators must be regarded as legitimate. They have proved their fitness before their application .for a new licence or renewal of an existing licence was granted.
Those who have survived the recession clearly demonstrate
their ability. But for many it has been a struggle. The problem has not been the physical operation of their fleets but the financial management of their companies.
Balance sheets, profit and loss accounts, and trading statements are, to many of them, great mysteries of life, understood only by qualified accountants. They may feel guilty about not understanding the jargon but they live with their complex and get on with the job, leaving their accountants to keep the books.
This is understandable but unsatisfactory. The whole transport business is about money — the operator's money — and he should understand how it is managed.
Balance sheets are produced at the end of a trading period by which time it is too late to rectify mistakes. The accountant can do little to make an operation profitable after the job has been done and the account has been paid.
The aspect of accountancy which the operator must grasp first is getting the cash flow right. Problems in this area are probably greater in road transport than in any other business.
Few suppliers are prepared to extend credit to small fleet operators. On the other hand, Operators' customers squeeze them for the maximum credit.
In cash flow terms haulage operators are committed to seven items of standing charges which must be paid before the vehicle turns a wheel. Aggregated, this amounts to about 33 per cent of total operating costs for a vehicle running 1,000 miles a week.
In addition, there is the cost of fuel which must be paid for when it goes" into the tank before the vehicle starts earning.
Taken together these costs ac count for about 80 per cent of ti total runing costs.
This is a massive outlay befo the vehicle begins to earn. Tt situation becomes worse whc it is understood that the operati will "lay out" that money fi three months before his cu tomer pays the bill. He then r ceives payment for one mont leaving two months outstani ing.
To cushion the business fro the effect of these late payer operators require working car tal. At the start of business this
obtained either by personal nvestment, or borrowed -noney. Once the business is astablished, working capital is ;upplied from profit margins — Drovided there are any and depending on the cash flow being right.
In difficult times great temptations present themselves to mall businessmen. Dealing Dutside the law, cutting rates for a quick cash return, even dealing In cash "to get the cash flow right". None of these methods really work as the balance sheet NM show — alas, too late.
There is a greater but less obvious danger, however. The attractive contract can easily become the quick route to the ''scrapyard".
The potential customer offers 3 contract which would ensure Nork for the three vehicle fleet For a year. The customer is aubstantial and well known and respected. The work is assured and best of all, the rate offered is E5.00 an hour above the regular flourly rate. What could be better?
The increase alone would mean an extra £40.00 per vehicle per day, or £600 extra for the fleet each week — 00,000 pal Now comes the rub. The account will be paid three months In arrears.
However, a quick calculation tells the operator that the job will cost him £24,000 per 4 week month, £30,000 per 5 week month; but since he is receiving an enhanced rate he will manage to carry the credit period, he thinks. Dangerous thinking.
If he has E10,000 of working capital it would have disappeared by the end of the first month. Few three-vehicle fleets have that kind of money, so the outcome is apparent — he is bankrupt and liable to be sued ror breech of contract.
The formula for getting the cash flow right is simple. Obtain the maximum credit and then extend credit to others over a shorter period.
The accountant is the best person to fix the rate. He will do it with cash flow in mind. Getting the cash flow right means looking for the longest period of credit and extending the least. But there is another way. There is a transport term "getting something up front" — payment in advance. It happens.
During the days when onevehicle operators were running to the Middle East they got part payment in advance — and sometimes nothing more. The part payment was meant to cover fuel and subsistence.
Why should a substantial customer not be expected to pay a "retainer" equal to the standing charges for one week? Such a facility would allow the operator to make a marginal cut in the contract price.
Customers can also be encouraged to pay early or on time by offering them a 1 percent discount. However, before embarking on this course it is essential to make a cash flow projection , and the best person to do this is a qualified accountant.
Cash with order or cash on delivery are normal business practices except, it seems, in road haulage. This prompts the question — has the time not come when road transport should cease subsidising industry? That is what extended credit does. In an excellent book by Anthony Jay "The Balance Sheet Barrier"*, which should be read in conjunction with the video film of the same name, he illustrates the road to cash flow success, using the Tesco story. According to Mr. Jay, the late Sir Jack Cohen, who started life as a barrow boy in Chatsworth market London and rose to mastermind the Tesco empire, had the technique correct.
Sir Jack bought tea from Brooke Bond on three months' credit and sold it for cash. He used the cash to pay for his second consignment. That is how transport operators' customers use the operators' cash.
Operators cannot reverse the roles but they can cut back on the credit period.
Cash flow predictions are essential for long term business success. The shorter the term of the prediction the better. One week is ideal.
Understanding finance in a small and not so small company is absolutely essential for success. It should not be left to another member of staff, nor to the accountant. There is more to running a haulage company than holding a driving licence.
1"The Balance Sheet Barrier" is produced by Video Arts Ltd. 2nd Floor, Dumbarton House, 68 Oxford Street;London W1N 01-580 0652/0847.
It stars John Cleese and Ronnie Corbett, and could form the basis for an interesting meeting of RHA sub areas, tipper groups, and owner-driver associations.