Direction Magazine: Piloting Profits: 8 Steps For Being Proactive about Navigating your Business Through Financial Challenges in 2018
The following appeared as a cover article in Direction Magazine Nov/Dec 2017 and has been modified slightly to appear online. While this article is specific to moving and storage companies, the 8 proactive steps are applicable to any industry.
Economic, regulatory, legislative, technological, competitive and demographic issues are all suggesting that 2018 may be one of the most challenging years since 2008 for moving companies. Costs are predicted to go up, prices are not flexible, and already tight margins are going to be under added pressure. It is shaping up to be a year of the big squeeze on profit margins. This article will describe the proactive measures that you should implement now in your business so that you are better equipped to deal with these challenges.
Regulatory issues include the requirement of electronic logs in all trucks, more states (in addition to thirteen already existing) adopting the tough emissions standards that exist in California, increased challenges on the status of contract drivers, and EPA requirement for skirts and rear panels (boat tails) on trailers. These regulations will add to the costs of equipping your vehicles.
Legislative issues include a possible failure to amend the Affordable Care Act to bring down dramatic increases in medical insurance, and possible tax reform that might eliminate the deductibility of a move or interest on a mortgage, both of which would have a dampening impact on HHG moves.
On the competitive front, freight companies are increasingly getting into the shipment of household goods, third-party providers are demanding decreases in fees to satisfy promises to their clients and self-storage is predicted to grow 3.4% in 2018 which could impact storage revenue.
The biggest demographic issue will continue to be the chronic shortage of OTR drivers. Drivers are retiring at a much faster rate than those entering the pool, and this will put continued pressure on meeting customer needs and on labor rates across the board, which are expected to spike in 2018. Other issues include the fact that the population is aging and will move less, and the young millennials want to live in a hip urban setting and will own less and move less as well. Moving is not projected as a growth industry.
Material costs, labor rates, interest rates, fuel costs, and equipment costs are all going up in 2018, and competitive forces dictate that it will be difficult to increase prices. In addition, movement of household goods is a changing paradigm that will increasingly involve a combination of containers, rail, and freight, and greatly increase the complexity of pricing moves. It is likely that tariffs will not keep up with the increased costs, increasing the pressure on profit margins.
The age of technology is upon us and is changing our lives in ways that could not have predicted just a short time ago. It will not be that long before robots replace warehouse workers and driverless trucks help to solve the driver shortage. The technology already exists for both things to happen. With high discounts causing razor thin margins, it is difficult to earmark a lot of resources towards technological improvements, and the moving and freight businesses are a little behind the technology curve as a result. It is important, however, to keep up with current technology, and increased efficiency and profit margins will be the ultimate result.
All of these factors dictate that two strategies are paramount in facing the environment next year and going forward: strategic diversification and controlling costs.
Strategic Diversification
Diversification is desirable for at least two reasons: other lines of business tend to be much less seasonal so that revenue can be spread more evenly throughout the year, and profit margins tend to be somewhat higher in various commercial opportunities than interstate moves. The moving companies I have observed over the years that are the most profitable are those that are able to generate profits every month of the year instead of losing money in the first and fourth quarters of the year. The accomplish this by strategically adding non-HHG services to their business.
Diversification is a long-term strategy that should be part of the culture of your business. I had a CEO friend a while back tell me “We do not even allow employees to use the term ‘household goods’ in pursuing new lines of business.” This is contrasted by another CEO who, when I urged them to get into office and commercial moves, told me “Grandad moved people, dad moved people, and we move people. That’s what we do. We do not know how to move offices.”
This is a cultural attitude that needs to change from the ground up. Jeff Bezos, CEO of Amazon, says this about his company; “Every day is day one.” He is constantly reinventing his company because he knows that the environment is changing at an alarmingly fast rate. So it is with the moving industry. Make no mistake, new strategies and increased diversification are essential if you want to increase profit margins. Think strategically, and build this concept into the culture of your business.
Controlling Costs
That brings me to maybe my most favorite subject, controlling costs. This is something that is not done at all by some, and poorly by many. I have been in the offices of hundreds of CEO’s, and rarely experienced one that knew what comprised most of the costs listed on their income statement. Worse, very few CEOs of moving companies routinely measure the direct costs and resulting gross profit associated with any particular move or pack job. If you do, congratulations. You are in the elite one to two percent of all moving company CEOs.
The following are 8 steps that you should take to control your costs.
Step One: Make sure your expenses are separated into direct and indirect categories on your monthly income statement as follows:
Revenue
Minus: direct expense
Equals: gross profit ---- profit level one
Minus: indirect expense
Equals: operating profit ---- profit level two
Plus or minus: other income/expense
Equals: net profit ---- profit level three
Direct expenses are those that are directly related to producing revenue and include direct wages (packers, drivers, warehousemen, etc.), vehicle operating expenses (excluding admin. vehicles), packing/warehouse supplies, claims, other transportation expenses, and owner/operator expense.
Indirect expenses include administrative wages, advertising, bad debts, utilities, legal, accounting, travel, entertainment, office expense, professional fees, rent, etc.
If your income statement does not look like this, then ask your accounting manager to reformat it. It essential to helping you preserve your profit margins.
Step Two: Carefully track your gross profit margin which is gross profit divided by revenue. You should know not only what it is, but what it should be in your company. This is the single most important thing you will do to preserve profit margins because a decline of one percent or less in your gross profit margin has a huge impact on your operating and net profit margins.
Unfortunately, I have never had a CEO that could tell me what the gross profit margin should be for their company, and because there is so little emphasis placed on it, there is no available data on what a good gross profit margin for the industry should be. This is a serious shortcoming for the moving industry. Based on my experience with a relatively small sample size, the average gross profit margin is somewhere around 35 to 40 percent.
If we knew this one number with greater certainty the entire industry would be more profitable because firms would be more knowledgeable about pricing their services. Measure and track the gross profit margin for your firm and make sure you know when it declines and why. A decline means that you are either not controlling your direct expenses or you are not pricing your services correctly, or both. Costs are going up in 2018 and you need to adjust prices accordingly or your margins will obviously decline. If everyone did this, everyone would make more money. Knowledge is the key to this.
Step Three: Sit down with your CFO or accounting manager and go over every single dollar of indirect expenses that you are spending.
Dig into the details of the general expense categories, and make sure those expenditures are necessary. I have never seen a case where cost savings of ten percent or more could not be achieved by doing this analysis. Make sure you track every expense category monthly as both a dollar amount and a percent of revenue. If the percentage of revenue increases, that means that it is going up faster than revenue, and margins are going to decline. Find out why and take corrective action if possible.
Step Four: Make sure you know exactly what comprises your non-operating (“other”) income and expenses below the operating profit line.
Always include interest expense in this category.
Step Five: Get rid of your unproductive employees.
I apologize if this sounds callous, but you know you have them and they are hurting your profitability and bringing down the morale of the entire company. A typical business has three types of employees: A employees, those that consistently exceed expectations; B employees, those that can be counted on to meet expectations; and C employees, those that consistently fail to meet expectations. Identify your C employees and tell them specifically what you expect them to do to stay employed. Explain to your B employees how they can become As. This is neither an easy nor pleasant task but everyone will thank you, and the only comment they will have is “What took you so long?”
Step Six: Ask for help.
Controlling cost is not a one-person job. Ask your leadership team and senior managers for suggestions and ideas on how to cut costs. Ask all your employees for suggestions on increasing efficiency and give cash rewards for good ideas. Everyone should be enlisted in this effort because everyone will benefit. If the company makes more money, then so will they (and vice versa).
Step Seven: Know your job costs.
What are the direct costs of a pack job and what is the gross profit? More important, what should it be? If you know that the direct costs of a move are $6,850, how should you price it? What is the gross profit margin that you expect? What is the cost per mile of operating a vehicle? What is an expected labor percentage?
Step Eight: Download two very important Excel workbooks designed for the moving industry from the AMSA website.
The first is Move Mastery, an Excel workbook that will allow you to both track and forecast your three profit levels. In addition, it will automatically calculate your key financial ratios and cash flow. Use it every month to ensure that you are achieving the profit margin goals that you have set for your organization.
The second is Job Costing, an Excel workbook that calculates the gross profit margin on any service that you provide. If you take the trouble to track this on a regular basis you will eventually learn what the profit margins are on services you provide, and what they should be.
EDIT: These templates are available here.
Conclusion
2018 is going to be a challenging year, but there will be firms that will generate profit margins well in excess of industry averages. They are the ones that diligently measure and track their costs every single month. They not only know what their margins are but what they should be. They take the time to forecast financial statements and track progress. They know the difference between profits and cash flow. The above-mentioned tools will help you do all this. Be sure to download and use them regularly.
Diligently track all three levels of profitability: level one, gross profit and gross profit margin; level two, operating profit and operating profit margin; and level three, net profit and net profit margin. Three important ratios, not thirty. It won’t take long and this is an important thing to add to your chores now to you help increase your margins.
While significant profitability in the coming years is not guaranteed, it is certainly attainable. Think strategically. Dig into the numbers. Know your costs. And remember, every day is day one.