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The money that a transportation company earns from customers is called revenue. An understanding of the different types of revenue and the costs spent to earn revenue are essential to maintaining profitability. Determining the appropriate rates or what to charge customers is also a critical part of generating revenue.
Each transportation provider must understand their revenue and the associated costs to generate sufficient revenue to achieve target profitability.
- Operating margin: The percentage of revenue remaining after subtracting the operating costs to generate that revenue which is a measure of profitability. Operating margin is equal to operating income divided by revenue.
- Operating ratio: The percentage of revenue which is represented by operating costs which is the opposite of operating margin.
- Rate: The amount charged a customer to performance a specific service or services.
- Revenue: The income produced by a given source or from servicing customers.
Summary of requirements
Determining operating ratios/margins. In order to determine the operating ratio of a transportation company, all costs must first be identified (see Cost section for explanation). Once this is done, operating ratios can be determined by using either the per-mile costs and revenues or the total costs and revenues.
Example: A company determines that it has a total operating cost per mile of 95 cents. The same company further determines that it is realizing $1.00 per mile in revenue. This would mean that the operating ratio is 95 percent ($1.00 divided by .95 = 95 percent operating ratio). The opposite side of this equation is that the operating margin has now been determined to be 5 percent.
What this means is that 95 percent of all revenue this company is generating is going to the operations of the company. This could also be stated as realizing a 5 percent operating margin (profit).
There are only three ways to improve an operating ratio; cutting costs, increasing revenue, or increasing efficiency. Some Fleet Managers feel that the easiest way to improve the operating ration is to not spend money. This train of thought should be avoided, as it rarely produces positive results over the total operation of the company.
Drastically reducing costs and spending can have an adverse affect on the overall operation. A reduction in training costs related to compliance and inspection for example, could lead to increased maintenance costs and fines due to improper vehicle inspections and non-compliance fines.
The adage "You have to spend money to make money" holds true in the transportation industry. It is important to remember that the key to lowering costs and increasing operating margins is to spend that money wisely. Continually reviewing the operating budget and costs line-by-line, making small changes and tracking their results, and assuring efficient operation of equipment through thorough training, are all ways of keeping operating costs to a minimum and realizing maximum operating margins.
Potential vs. actual revenue. Calculating revenue per mile is relatively easy, but revenue should also be calculated over time. It does no good to make a high per mile revenue if the vehicles are not rolling.
Determining the maximum potential revenue a unit can make over time is a simple process. To do this, determine the normal revenue for a unit per mile, and multiply that by the maximum number of miles the unit is expected to run hourly, weekly, monthly, quarterly, or annually. If using weekly, monthly, quarterly, or annually, remember to allow for times when the vehicle is expected to be "off" such as repair time and driver days off.
What has been calculated is the revenue goal per unit, based on time. How that revenue is generated is irrelevant. The vehicle could be generating revenue driving down the road, collecting accessorial charges, or performing local cartage. What is important is that a revenue figure based on time has been determined for each vehicle, and can now be tracked for productivity and profitability.
It is important to remember that lost revenues can and should be measured. These revenues are most always a loss to the carrier that can not be recovered. Unpaid sitting time, unbilled activities, and unpaid billing for services rendered, are the three biggest contributors to lost revenue.
Traditional and non-traditional revenue possibilities. Traditional revenue is typically generated by the mile, the trip, or the hour. Revenue is a payment for prearranged service that is realized after completion of that service. Revenue can be increased by asking customers for rate increases however, a Fleet Manager should also look at accessorial charges as a way to increase revenue.
Accessorial charges are charges related to the customer's use of the vehicle and the driver in non-transport related activities. These are considered part of the traditional revenue stream in the transportation industry and should be continually evaluated.
Charges for loading, unloading, detention, and driver assistance are all considered accessorial charges. Reconsignment, trailer storage, trailer pooling, and trailer spotting are looked at as accessorial charge services as well.
The key to accessorial charges is that they must be agreed to in writing, in advance. Few accessorial charges are paid by shippers or receivers that were not agreed to, in writing, beforehand.
Non-traditional revenue involves using the company's assets to generate revenue in ways other than transporting cargo. Performing billing services for other carriers, hiring out the shop function, and brokering freight, are all ways of increasing revenue in non-traditional ways. Towing and recovery, warehousing, and cross-docking, are also functions that could be provided to create additional revenue in a non-traditional way.
A Fleet Manager would need to contact local and state regulating agencies to assure compliance when looking at these revenue generating options. Just because a company is authorized to operate as a trucking company and has a warehouse, does not mean it is automatically authorized to operate as a warehousing entity for profit.
Rate determinations. Determining rates for customers, also referred to as bidding, can be as easy as a handshake, or as complicated as a lengthy proposal and negotiation process.
No matter how simple or complicated, rate determination must begin by determining the costs associated with the customer, the revenue needed to cover those costs, and the operating margin that needs to be realized. Cost information should be continually updated to speed the rate determination process and hidden costs should be identified and considered.
When looking at operating margins per customer, several factors need to be considered. Customers that are willing to commit to a high volume and longer terms can be given a lower margin because the revenue is more predictable and consistent. In addition, customers that pay quickly, or have freight when others don't, should be considered for slightly lower margins since they help a company maintain its revenue stream.
In contrast, customers who pay slow, have little volume, are less reliable, and are generally difficult to haul for, should not be given rate considerations or reduced margins. These customers are certainly looked at as necessary for the continued success of the business, but are not looked at as reliable "partners" in transportation.
Another important consideration when determining rates is front haul vs. back haul freight. Front haul freight is the freight that is hauled for a company's' loyal and reliable customers where back haul freight is generally looked at as necessary to reposition a vehicle so that it may once again, service the main customer.
When determining rates, location of delivery and availability of back haul freight must be considered as these can dramatically reduce the profitability of the transportation company and the margins afforded to the shipper or customer. If back haul freight is not readily available, or large amounts of deadhead are necessary to get to any type of reasonable freight, the rates for the front haul freight will need to be reevaluated.
Determining rates is not a complicated process. In order to be accurate, each trip must be looked at as a continual movement of the vehicle. Unless a company is planning on leaving a vehicle at the receiving location, the trip is not complete until it returns thus; the rates for the trip are not accurate unless calculated through to the next front haul point.
READ MORESHOW LESS
['Business planning - Motor Carrier']
['Revenue - Motor Carrier', 'Cost management and strategy - Motor Carrier', 'Company growth - Motor Carrier', 'Business planning - Motor Carrier']
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