By Daniel Rutherford, Virtual CFO, Anders
Most trucking company owners don’t get into business to focus on accounting principles. However, the reality is that cash is king. Ensuring your business’ financial health and that you are following accounting principles to a “t” allows you to focus on your business goals.
We’ve highlighted four costly mistakes transportation and logistics business owners make to help boost your financial wellness and get you on the right path towards improving profitability. Find out the most common mistakes below.
1. Noncompliance with Generally Accepted Accounting Principles (GAAP)
When looking at a transportation company’s financial records, it’s common to see big swings in monthly net income. One month shows a huge profit, the next a big loss — and the owner isn’t sure why. In most cases, though, the problem isn’t the business itself; it’s that the bookkeeping isn’t following GAAP (Generally Accepted Accounting Principles). Without matching revenue and expenses properly each month (known as accrual accounting), business finances paint a very misleading picture.
The reason this is a common issue in the transportation and logistics industry is because there are many prepaid expenses or accruals, such as insurance, fuel cards, and claims. Financial statements and records can be thrown off if the numbers aren’t recorded in the right periods. When these costs are lumped into one month instead of being spread out appropriately, it makes profits and losses look more dramatic. Over time, this causes large issues like incorrect tax payments. Sticking to GAAP compliance isn’t just about proper bookkeeping. GAAP compliance provides trucking owners the ability to benchmark themselves against competitors, apply for financing, and make informed decisions.
2. Not Configuring Financials for the Trucking Industry
Trucking businesses should ensure that their financials are configured specifically for the transportation industry. What works for creative agencies and manufacturers is not necessarily what is right for a transportation business.
This means configuring expenses into appropriate expense groupings:
Purchased transportation: Similar to ‘Cost of Goods Sold,’ this category covers all expenses related to operating a truck. It’s helpful to break it down into the following subgroups:
- Driver, fuel and tractor
- Trailer
- Insurance and claims
- Other
Operating expenses: These are ongoing expenses associated with day-to-day costs of running your business. Operating expenses can be broken down into subcategories:
- Operations
- Admin expenses
- Cost of money (this subcategory is for companies utilizing lines of credit or loans accruing interest)
Expense groupings allow trucking companies to get granular with their metrics and compare their current position against industry standards. This comparison helps identify what weaknesses should be addressed to improve profitability. Regular monitoring also helps pinpoint where spending hikes occur and give your team a heads-up that something may be wrong.
3. Missing Internal Control Procedures
Internal controls decrease the risk of fraudulent activity committed by your employees. Business owners want to place trust in their employees. When hiring, owners tend to look for candidates with great character and, therefore, internal fraud does not seem a likely outcome. However, remember that good people can make bad decisions when under external pressure.
All businesses should have internal controls in place, especially cash management controls. Internal controls should be tailored to your specific business needs and risk tolerance levels. No single person should have the capability to authorize transactions, maintain custody over assets, or maintain financial records and books without oversight or review of another employee.
4. Forgetting About Tax Planning and Compliance
Taxes. A word everyone dreads, especially small business owners. However, tax planning and compliance quite literally make or break your business.
Working with a qualified tax professional helps you determine your current tax liability and potential tax savings to lower said liability before filing tax returns. Knowing this liability ahead of the April tax deadline ensures you set aside and submit the correct amount of taxes each quarter, but it prevents a larger bill from surprising you at the last minute. No one wants to owe the IRS money – especially when it’s already been spent.
Tax compliance is just as important as tax planning. You likely worked with a CPA or an attorney to decide the right organizational structure for your business when you were in the startup phase. However, a common mistake trucking company owners make is not setting up a leasing company for their equipment. Keeping your operating company safe by having an additional leasing company keeps your assets safer if a lawsuit comes your way.
If your business avoids these four mistakes, you will be well on your way to building a strong financial foundation.
Dan began his career as a revenue agent with the IRS, eventually working his way up to a role as a large-case team coordinator where he was responsible for leading audit teams of large, often multi-national corporations. For 22 years, he served as the CFO for two large trucking companies, which provided him with unique insight and experience in the transportation and logistics industry.