Heed the warning lights
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DAD HAULAGE has never nked with the stock market or operty development as a way quickly reaping rich rewards if )u have some capital to spare. :arting a haulage business ;ually means long days, conJerable financial risk, and all r small margins when corn;red with other forms of investent.
But in these days those small argins are liable to dwindle ,en further to nothing or even a loss. Most haulage corn;nies are having a lean time — id they're the lucky ones. 5rne hauliers, particularly viler drivers and the smaller isinesses have, to put it polily, ceased trading.
How do you recognise when )u're going into a dive and you in't pull out of it? Are there any arning lights that will start to ish or is it already too late? 'hat can you do and how can au minimise the risks?
To try and find the answers I )oke to chartered accountant Dy Adkins, a partner in the ac)untancy firm of Thornton aker. Based at the Birmingham fice, Roy specialises in re:ivership business — that is to trying to recover a company hen things are looking black. He is particularly well qualified ) speak about problems 3uliers face since he has permally handled the receivership several transport companies 'id in fact is a director of a gen'al haulage company in the rest Midlands — a company at Roy had previously helped his capacity as a consultant hen its future seemed uncerin.
Roy Adkins first explained hat a receiver actually is and hat he does. If you see a report at the "official receiver" has aen called in then you can !ckon that the company is beand redemption — he is the Government-appointed unartaker", there to sell off the ;sets and wind up the cornany.
A "plain" receiver is normally rut not exclusively) a chartered ::countant, called in by a comany's main creditor — usually le bank — because the creditor as not been paid and feels it is Dt likely to be in the near future. ius, the creditor, who must be debenture-holder, can appoint receiver to go into the ailing 3mpany. The receiver will first aim to set the business back on its feet again. If this is not possible he will try to sell the business intact as a going concern and pay the creditors. Failing this, as a last resort the receiver will split the business up, selling property and assets to realise the necessary cash.
That briefly is his role, but really it's more useful to know how to avoid meeting one!
Roy Adkins said the first step is to get the business off on the right financial footing; if this is broadly right you're giving yourself a head start in the survival stakes. By this Roy meant the "long term financing of assets". In other words, don't start your business solely with a massive loan from, say, the bank. With all your eggs in one basket it's rather risky, so try to look for alternative sources of finance such as private enterprise, to spread the load.
This dependence on one massive loan is a relatively common fault in small businesses and Roy said it is one of the most frequent causes of problems in cases he has handled.
Right, you've found your sources of capital — what's next? Roy Adkins said that to begin with, while your haulage business is in its fledgling stage, it's a good idea to keep the amount of capital assets fairly low. Don't splash out on too many expensive vehicles, trailers and so on; they can turn out to be a millstone round your neck, especially when you take into account the cost of borrowing money to buy them in the first place.
So hiring or renting vehicles, equipment or premises can make sense in the early stages of the business. You'll pay a little extra for the privilege but the risks will be less and the ability to dehire and rehire will give you valuable flexibility when the business is not yet stable and established.
Another good ploy for the new haulage business such as an owner-driver just setting-up is to try and get a contract working for a larger company or manufacturer. Opinion is divided about this, but Roy believes it's a safe bet — you won't make a killing but you are more certain of a steady income. Once you have gained the experience and reputation you can try your hand on the open market where risks and rewards are generally greater.
Wherever margins are tight, good credit control is all-important. The small operator such as the owner-driver is often at the mercy of larger companies who are not in a hurryto pay their bills. But Roy thought it vital that the operator calls in his debts very promptly — don't start stretching your customers' credit period or else you'll have cash-flow problems.
The golden rule is don't give more credit than you're getting yourself. So if you get just 14 days to pay, you in turn give somebody else just 14 days to pay, and not a minute longer.
Any good transport business, no matter how small, should have a well-reasoned vehicle replacement policy. Before you buy a vehicle you should know how long you plan to keep it, taking into account such things as maintenance costs, spare parts, resale value and so on. This will dictate whether you decide on cheaper vehicles and replace them more quickly, or go for premium vehicles and keep them longer.
Said Roy: "The important thing is, having decided on a replacement policy, that you stick to it." Assuming your policy was not too ambitious in the first place it must be detrimental not to keep to it. Yes, it is tempting to keep the vehicle "just another year," especially now when trade-in prices are so low. But Roy felt this was a false economy and that you will pay for it later on. Maintenance costs will go up and next year the gap between the value of your vehicle and the price of a new one will be even greater.
Roy Adkins is very much in favour of a haulage company being diversified. Once the business is established it's not generally a good idea to be dependent on one customer. If for any reason that customer changes his transport arrangements or ceases trading, then your whole business is gone in one fell swoop.
Roy went further in that he advised a haulier to try and get work from customers in different fields of business. For instance, if you primarily work for car transporter company A don't look for work with car transporter company B; if A is having a hard time it's likely that B is feeling the pinch as well and so you're still in trouble.
On the other hand, you can diversify too far — witness the international haulage company that ventured into trailer manufacture and came badly unstuck. Manufacturing is very different from operating. So the rule is to look for a business that is both closely allied to and independent from your own. As an example, Roy Adkins gave an established haulage company with its own warehouse branching out into public warehousing. The basic knowledge should already be there and help the wa rehousing side become profitable in its own right.
Remember, wise diversification reduces your vulnerability; unwise diversification only increases your risks, said Roy.
In the present trading conditions most hauliers are, of course, working for low, low rates. Understanding the need to be competitive and realistic, Roy Adkins said that rash rate undercutting is self-destructive; it keeps the wheels turning but in the long run they may seize up altogether.
"Working for uneconomic rates, possibly even below your true costs, can be tolerated for a short time only. It is a very dang erous path to tread," warned Roy.
He also commented that operators shouldn't be tempted by a long-term contract at low rates — "You'll lose flexibility and won't be able to take advantage of any better jobs that might come along".
In Ray's experience, road transport businesses don't often fold overnight. It's normally a gradual decline, and if the owner or management cares to stand back and examine the business he should be able to recognise some of the warning signs mentioned above.
An exception to this is when, as mentioned earlier, the 'haulage business is heavily dependent on one particular customer or market and this fails; the haulier can follow suit pretty quickly.
Following on from this, a worthwhile tip for a haulier is occasionally to examine the customer or market served. If it seems likely to be heading for a difficult period, then treat this as an early warning for yourself. It might be a good time to seek new business before any general exodus occurs.
The signs are often there. It's a case of being able to step back and take a look at the wider surroundings of your business and work out the consequences. Roy felt that this was probably the only way of trying to forecast the future, and believed that more companies fold because of market conditions than because of gross management incompetence.
An option for a struggling haulage company Roy Adkins personally finds quite attractive is amalgamation. Two such small haulage companies could get together, sharing yard and depot facilities, increasing utilisation of workshops and fitters, co-operating over fuel bunkering, overnight parking, return loads and so on.
The possibilities are limitless. The two fleets could either remain entirely separate or merge to various degrees. Whichever path is chosen, the resulting rationalisation and economies of scale might well do the trick and help both companies survive more easily.
Above all, Roy said the most important piece of advice he could give was this: If you see things going wrong in the business don't try and hide it from your bank manager, who is nor mally your major creditor.
If you do try and keep you financial problems to yoursel the bank will eventually find ou when you can't repay your debt: and will be forced to call in receiver. True, the receiver car often rescue the business intac but it can be a traumatic exper ience with the receiver havini the power to block all spendini and decisions, no matter hov small.
And of course, a receive doesn't donate his service freely; he normally charges ai hourly rate and it's not cheap The receiver's success in res cuing a company will normal!' stem from his financial and ac counting skills plus the greate co-operation he can commanc Said Roy: "The receiver win breathing space and relieves th pressure under which the regi lar management has been tryin to work".
Whereas the bank drew th line on them, it will usually b prepared to extend more time c credit to the receiver who wa probably appointed by the ban itself.
Using these techniques, plu co-operation from the labot. force, the receiver can ofte bring the patient round — he i after all a creative force, not destructive one.
Taking Roy's advice, whi happens if you do contact th bank about the financial diff culties relatively early on, befor the bank contacts you? It's quit possible that the bank wi recommend an accountant t come and help out if it can't so out the problems itself. And it i equally possible that the accour tant is the same man who woul come in as a receiver if matter had been left longer.
But the difference is that it far better to have the accountar there in his capacity as a consu tant rather than as a receive There's no.stigma attached an being there much earlier, th chances of a successful recover are correspondingly greater.
Roy Adkins agreed that time are hard for transport operator right now. He reported that th level of receivership business h and Thornton Baker as a whol are doing, is significantly up, ix strangely, haulage companie are not accounting for a disprE portionately high percentage.
Sadly, Roy was realistic an expected that a considerabl number of hauliers will b finding themselves in rE ceivership. But, as he pointe out, a receiver is there as a do' tor not an undertaker and it is b no means necessarily the end E the road.