Benchmarking: Transportation Industry

Benchmarking: Transportation Industry

Is your transportation company performing as well as its industry peers? You reviewed your financial statements from your accountant and you are making money. That is great, but what else are the numbers on the paper telling you?

Utilizing benchmarks is an easy way to determine how well your transportation company compares to others in your industry. Below are benchmarks regarding five major subgroups in the transportation industry:

  • Public School Bus Services
  • Chartered Bus Services
  • Local Freight Trucking
  • Long-Distance Freight Trucking
  • Airport Operations

Every transportation company is unique and the below standards will not apply to all. These metrics should be used as a guideline. Statistics and information was provided from the IBISWorld Industry Reports, June 2018.


Public School Bus Services

  • Profits are expected to average 7.2% of earnings before interest and taxes for school bus operators. This is dependent on company size. For example, larger school bus companies have profit margins closer to 10.0% due to economies of scale. In recent years, profit margins should be climbing slightly due to lower fuels costs.
  • Wages represent the most significant cost for industry operators. Due to the labor-intensive nature of the industry, operators can expect to see wages near 46.2% of total revenues.
  • Purchases and fuel are another large cost of the transportation industry. With acquisition of buses, leasing, and licensing, 27.8% of revenues can be accounted for through purchases. School buses can range from $65,000 to $85,000, with newer, more technologically advanced buses even reaching up to $185,000. Assuming an average of 7.0 miles per gallon for a school bus, we can estimate roughly 1,700 gallons of gasoline are used each year (average 12,000 miles driven). Fuel can be anywhere between 20% and 30% (5.56% to 8.34% of total revenues) of your total purchase expenses.
  • Depreciation costs average 9.7% of total revenues. This number has decreased over the past five years due to increased investments into software that helps to track vehicles, verify inspections, and track and manage fuel consumption rates. This information can help to extend the life of capital investments, such as buses.

Chartered Bus Services

  • Profits (earnings before interest and taxes) average 6.4% of revenues. Flexibility in the economy’s disposable spending and increasingly popular and inexpensive curbside lines have caused growth over the past five years for chartered bus services.
  • Purchases are the industry’s second largest expense behind wages. Averaging 15.7% of revenues, a majority of this expense category lies in gasoline purchases. Smaller companies tend to feel the impact of changing fuel prices versus their larger counter-parts.  Typically, this difference is due to larger companies having the resources to purchase fuel in bulk, or enter in forward purchase contracts.
  • Wages, the largest cost for companies, average 33.7%. This cost segment varies largely between company sizes. For instance, workers in traditional scheduled bus service positions usually belong to a union, which can help to increase their wage negotiating power.

Local Freight Trucking

  • Profits are typically low in this industry due to the competitive nature. Most trucking companies in this industry are non-employers that operate with extremely thin margins.  Profit as a percentage of revenues averages 6.7% for the industry.
  • Wages represent the largest individual expense at 30.9% of revenues. With labor being an essential component of this industry, companies can expect to see wages follow trends in overall demand for services.
  • Purchases average 32.2% of revenues with fuel-related expenses making up the majority of this category. Fluctuations in fuel costs impact this category most often. As prices increase, profit margins thin, with only slight relief to larger employers whom have fuel surcharges in place.
  • Rent and utilities in this industry can account for 5.0% revenue. It is typical of companies in this industry to rent and operate warehouses and distribution centers.
  • Depreciation is a given in this industry. Roughly 4.6% of revenues can be allocated to depreciation to account for every truck and trailer a company owns.
  • Marketing is minimal at 0.2% of revenues. In many cases, operators conduct business through freight brokers or through existing long-standing relationships. Marketing campaigns direct-to-consumer are rarely used.

Long-Distance Freight Trucking

  • Profit in this industry is relatively low at 5.9% of revenues. This is up from 4.9% in 2014.  Companies are constantly competing on prices to win business, which ultimately hurts profits. The prices of diesel over the past 5 years explains the jump in profit margins.
  • Fuel and purchases are expected to rise as the price of diesel is anticipated to increase again over the next 5 years. However, with a strengthening economy and an increase in demand for services, negative impact on profit margins from fuel costs could be offset slightly. Fuel and purchases on average account for 29.1% of revenues.
  • Maintenance and other costs average 9.9% of revenues. These costs typically include upkeep on trucks, trailers, and containers. 
  • Depreciation costs have grown to 6.9% over the past five years as demand for more technologically advanced and fuel-efficient vehicles has increased.
  • Rent and utilities make up 17.6% of revenues. This category not only would include warehouses and distribution centers, but cost of electricity as well as truck or trailer rentals.  Lease-to-own financing on truck purchases are included in this segment of expenses.

Airport Operations

  • Wages and other labor expenses represent the largest expense in an airport operators cost structure. Worker role ranges from air traffic controllers, security guards, engineers, and maintenance workers to managers and even a police force in some cases. Wages average 36.5% of revenues.
  • Purchases represent roughly 10.4% of revenues. Operators in this industry often need specialized equipment for things such as aircraft refueling, maintenance, cargo and baggage, ferrying, and other services. 
  • Profits average roughly 6.0% of revenues, up from 4.7% in 2014.
  • Depreciation costs are a substantial cost for airport operators, averaging around 33.7%. The construction and operation of an airport requires substantial capital investment into things such as a runway, terminal, hangar, and communications equipment.

Questions?

To bring you innovative solutions, our Transportation Group stays on top of industry benchmarking, trends, tools and technologies to ensure we give you the best possible advice. Smith Schafer professionals have serviced the transportation industry since 1971 and is committed to serving over 100 Minnesota transportation entities. We take great pride in consulting on various industry specific issues, as well as the broader needs of these companies and their owners.

6 Tips on Creating a Budget for your Construction Business

6 Tips on Creating a Budget for your Construction Business

Does your construction company have an annual budget? Owning and operating a construction business is not easy and requires expertise in your craft, as well as in-depth knowledge of your company’s finances. According to data from IBISWorld reports, one of the top success factors for a construction company is effective cost controls and budgeting.

A budget:

  • Supports planning and financial goals
  • Assists with managing your money
  • Helps keep costs under control
  • Aids with the decision-making process

Here are six tips to help you create and maintain a budget for your construction business:

1. Develop or refine your business plan.

Your budget is a financial representation of your business plan. Creating a budget should not be attempted until you have a developed and refined business plan.

2. Look at the market.

You should regularly monitor construction industry trends and your business market(s). You should also study local economic projections and census data. A rise in population and a thriving economy may lead to increased residential and commercial building spending. After studying your market trends, connect this with your business plan to develop a realistic idea of potential revenue.

3. Evaluate your expenses.

The next step is to evaluate your expenses:

  • Start with your direct costs, which are expenses related to a specific project and include materials, labor and subcontractor services.
  • Next, assess your monthly fixed costs like rent and salaries.
  • Finally, review how your remaining costs vary month to month.

This will help determine cash flow needs at various times throughout the year.

4. Determine if your rates are reasonable.

Once you have evaluated your revenue potential and your actual expenses, you will need to determine the amount of revenue needed to pay your expenses while also leaving enough to show a profit at year end. Your project rates may need to be adjusted accordingly.

5. Create a spreadsheet.

Organize this information in a spreadsheet or online budgeting software. Choose a tool that is convenient and easy for you to continue to use going forward.

6. Track your progress.

Compare actual results against your budget and adjust your budgeted numbers as needed. You should review your income statement and cash flow statement monthly.  These reports can be created by your internal accountant or CPA firm, and should be shared with other members of your management team.

Maintaining a realistic budget will allow you to make informed business decisions that will lead to continued success. Use these tips to create a budget and keep your financial progress on-track as your year unfolds. Need help? Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. Contact us today to learn business strategies that will help you grow and save you money.

Expense Creep – 3 Simple Steps to Improve Business Profitability

Expense Creep – 3 Simple Steps to Improve Business Profitability

As a time goes by, normal expenses for a business tend to “creep up” and begin to erode a portion of profits. Has this happened to you and your business?

3 simple steps to improve the profitability of your business:

1. Identify general ledger expenses as one of the following:

  • Discretionary. These are expenses that could be eliminated and it would not directly affect the operations of the business.
    • Examples – Entertainment/tickets, sponsorships and 401(k) match.
  • Controllable. These are expenses monitored by management and can be controlled to increase profitability. 
    • Examples – Supplies, office related expenses and labor. 

Management of these expenses is an important area to examine for expense creep.

  • Non-controllable Expenses. All remaining expenses should be classified in this bucket. They are not discretionary and cannot be controlled by management.

2. Now that you have properly identified expenses, we recommend examining each of the discretionary expenses and determining if the incurrence is adding value to the business. If not, consider either eliminating or reducing the expense amount moving forward.

3. Finally, you should review each of the controllable expenses. Identify what is the appropriate amount or percentage each expense should maintain. We recommend creating a system to monitor and report expenses and compare them to the pre-determined goal.

“What gets measured gets managed, and what gets managed gets improved.”

This simple exercise is a very effective way for your business to better manage expenses and reduce the effect of expense creep. If you would like assistance implementing a program such as this, please contact a Smith Schafer professional.

Valuation: The Market Value Formula

Valuation: The Market Value Formula

The words “Business Value” or “Business Valuation” by themselves hold more than a singular definition. The complexity of business valuations, make it challenging to fully grasp what is involved in the process of valuing a company. There are three main approaches when establishing a value for a company:

  1. Asset
  2. Income
  3. Market

KEY FACTORS TO USING THE MARKET APPROACH

The market approach involves finding comparable sale transactions for other businesses in the same industry or finding comparable publicly traded companies to compare to the subject company. Below are important components to be included when using this business valuation approach.

Identifying an Industry

Valuation analysts will start by determining the industry the business operates in. Understanding exactly what industry is critical to utilizing this method. Research begins by gaining a complete understanding of the business, the customers, products, markets and competitors. After this information is collected, the next step is to identify the business NAICS and SIC codes. There are many generalized industries, including construction, wholesale, manufacturing, or information technology, but the valuation analysts will determine the correct industry classification within these broad industries. Finding the industry is important to utilizing the correct comparable information. 

Market Research & Comparable Companies

A significant amount of time is spent on market research and finding comparable companies. Valuation analysts start by using the business NAICS and SIC codes to search databases for comparable sales transactions.

Note: A common misconception is using this method is similar to a real estate appraisal. The misconception is, if a house is sold in the same general area, is a similar size, has comparable features and built around the same time it should have the same value. This may hold true for real estate, but businesses are more difficult when trying to compare.

Once the valuation analysts have a group of comparable companies, they research the transactions to determine if they truly are comparable. Most analysts will narrow the sample of businesses to five or 10 and conduct in-depth research on those businesses.

Multiples

When pulling together a group of similar businesses from a databases, zero in on the multiples of sales, earnings, or cash flow to develop an average multiple applying to business financial information. From the comparable transactions, valuation analysts will develop ratios of sales to selling price, cash flow to selling price, or earnings to selling price. If using comparable public companies in the analysis, look at the ratios published in annual reports, such  price to earnings. Use the average price earnings ratio to calculate a value of the business by applying ration to the  net income. It is important to emphasize this method can only be used if there is an adequate sample size.


CONTACT US

There are many reasons a company may want or need a business valuation, including negotiating a merger or business sale, estate and gift tax planning, considering new shareholders, attempting to resolve partner or other liability disputes, determining shareholder equity or even marital dissolution. A business valuation may also be useful for strategic planning and bench-marking purposes. Whatever purpose the valuation is fulfilling, it is vital to engage experienced professionals who will take a comprehensive view of all the company’s investments.

Free Download: Bookkeeping Class Presentation

Free Download: Bookkeeping Class Presentation

We teamed up with CEDA to offer a free bookkeeping class to local businesses on August 6, 2019! Smith Schafer Principal, Trisha White, discussed:

  1. Why bookkeeping is important
  2. Choosing software
  3. Basics of hiring employees
  4. Budgeting and why it’s important
  5. Accounting methods (cash vs accrual)

Enter your email below to download your copy of the presentation.