Fleet Management News & Business Info | Commercial Carrier Journal
Issue link: http://read.dmtmag.com/i/319866
COMMERCIAL CARRIER JOURNAL | JUNE 2014 67 range for current ratios in the trucking industry is at least 1.1 to 1 or better. Profitability ratios are measure- ments drawn primarily from the P&L. Strong sales are important, but more important is maintaining the margins as you grow your company's revenues. Operating ratio, known as "OR," is a basic and widely used measure of cost efficiency. It is calculated as a company's total operating expenses, less interest and income taxes, expressed as a per- centage of total company revenues. This is not to be confused with "operating margin." Suppose your company's total revenue was $1 million and that your total expenses were $1 million, includ- ing interest of $30,000 and income taxes of $10,000. To compute operating ratio, subtract interest and taxes, leaving $960,000. Divide $960,000 into $1 mil- lion, and your resulting operating ratio is 96 percent. Obviously, the lower your operating ratio, the better. Typically, an operating ratio below 95 percent is considered good, and outstanding com- panies often post ORs in the 80s. Operating profit margin is operat- ing profit divided by total revenues earned and is expressed as a percent- age. This is generally income before interest expense or taxes. Four to six percent is considered average, and the most profitable companies may have eight percent or more. Pre-tax net is income before tax divided by revenues. Three to four percent is average for trucking compa- nies; the most profitable are above five or six percent. Return on equity is computed by dividing after-tax net income by aver- age equity from the balance sheet. If your company earned $150,000 after tax on average equity of $900,000, you earned almost 17 percent return on equity. Evaluate this number against what other investments earn. Efficiency or activity ratios mea- sure management's effectiveness in certain business activities. The most common is average days outstand- ing for accounts receivable or DSO (Days Sales Outstanding), computed by dividing receivables by average daily revenues. If annual revenue is $7 million, each day averages $19,200 in revenue. If receivables total $850,000, the average receivable is outstanding 44 days ($850,000 divided by $19,200) from end of haul to payment — about industry average. If a company's ratio is 60, then someone needs to get busy collecting. A similar ratio can be com- puted for vendor payables, with most averaging 30 days or less. DSO computations can go much deeper than a simple financial calcu- lation. More sophisticated trucking companies start counting DSO from the time the truck is dispatched to the time the check is deposited into the bank. The masters of DSO do every- thing operationally possible to reduce this number. These guys want their cash! Refer to the CCU book "How to Manage Cash Flow" to see how to reduce DSO. COMMERCIAL CARRIER UNIVERSITY Sponsored by: Produced by: In cooperation with: Commercial Carrier University is an educational initiative for owners and managers of trucking companies that are held at select Truckload Carriers Association events. We're certain you will find this program a valuable resource in managing your business more easily and more profitably. CCU's goal is to provide you with an in-depth road map for success through clear advice on basic and advanced business practices. CCU Titles Available: &w to Evaluate Life Cycle Costs &w to Manage Cashflow &w To Plan For Succession &w to Use Financial Statements &w To Write A Business Plan Visit www.commercialcarrieruniversity.com for more information. CCU manuals are available on USB drives and can be purchased online through eTruckerStore.com.