Tools for Calculating and Reducing Expenses

Posted on June 1, 2004 by LCT Staff - Also by this author

Recently, five chauffeur transportation operators, all in similar markets, provided Charles Tenney and Associates (CTA) with their 2003 company financials. Each company produced annual revenues between $746,000 and $2.1 million.

As I reviewed the expenses for each company, I discovered some very interested data. Fleet costs ranged from 10%-53% (the percent of total revenue). Insurance expenses ranged from 4% -12%. Chauffeur costs ranged from 24% to 70%. And profits ranged from being up $246,000 to being negative $149,000.

What does this say about these five companies? To an industry outsider, the discrepancies may appear to be a result of poor management or inferior talent. From the industry insider’s point of view, the discrepancy may appear to be the result of certain factors – insurance, state/county regulations, etc.

Having spent almost an entire professional career analyzing chauffeured transportation company financials, I know why these operators’ expense data reports vary.

A System Based Upon Assumptions

As an industry, when it comes to calculating expenses, and working with profit and loss statements, we are a bit lost.

But, it is not our fault. There is a reason why operators are not strong in this area. Most of them are forced to use a cost measurement system based on assumptions – the assumption that you are doing everything right, that what your neighbor told you is right, and, most commonly, that there is no possible way to do things better.

Operators are forced to make these assumptions because, unlike other industries, the chauffeur transportation industry has no benchmark or base line to maintain uniformity when it comes to calculating expenses.

A missing ingredient that is vital to other industries is the use of “Standard Expense Definitions” – a system outlining how to categorize expenses in a financial sheet. Trying to compare expenses between chauffeured transportation companies is like comparing apples to oranges. Some operators lump the cost of health insurance and fleet insurance into a broad category of “Insurance.” Others don’t. So there is no mainstream system to organizing operating costs.

The McDonalds, the Midas, the Budget Rent-A-Cars of the world have the benefit of this knowledge. They pay mega-bucks for “how to” operation manuals (how to calculate and organize expenses, what to pay, what to charge, etc.).

Entrepreneurs of these businesses will not enter an industry without the knowledge of such procedures. Historically, members of our industry have not demonstrated the same kind of forethought when starting, maintaining or buying a chauffeured transportation business, primarily because the information does not publicly exist.

The reason why we don’t have standard expense procedures in our industry is because it would require us, to some degree, to share information with each other. As an industry, we are very guarded. We don’t trust each other. When we do talk to each other, most parties are usually exaggerating, delivering partial truths, or just flat out lying.

As result, we attempt to generate profits without the necessary indicators or benchmarks for comparing expenses that allow us to effectively manage the bottom line. Again, we’re working off assumptions – or what seems to be the correct way to do things.

Evaluating Your Peformance

You may wonder what does it matter how you organize your accounts if you are the only one reading them? Measuring your business performance solely against your own business’s past performance is better than not measuring it at all. But think about how limiting that can be. One operator only has the benefit of his/her own failures, successes and experiences. I don’t care if you have been in the industry 40 years. An operator has outperformed you on at least two to three expense line items.

Wouldn’t you like to have the benefit of knowing what other companies have done and what you might be capable of? Without organizing our expenses in the same format, we will never be able to compare apples to apples and therefore, never accurately determine how we all might improve. Think about organizing your accounts in terms of a golf match. If Tiger Woods and Ernie Ells go head to head – one course, the same 18 holes, and Ells edges Woods by one stroke, Woods would study his scorecard against Ells to find out where he lost the edge. They each played the same holes on the same course, and thus he can determine his exact point of failure.

The same exactitude is possible in our industry if we organize our expenses in the same manner.
Tools You Can Use
#1: Chart of Accounts

One thing that CTA has done to help our industry in this area is develop a “Chart of Accounts” for ground transportation operators. When CTA clients use the account descriptions in the chart of accounts they are able to compare their expenses, as a percentage of revenue, to industry peers using the same accounting format.

They also are able to use the national benchmarks our firm has developed from reviewing thousands of limousine company financials over a 27-year period. This sheet becomes extremely powerful when measuring how your business matches up “pound for pound” with the best run companies in the United States.

It is mid year, but is not too late to start reorganizing your accounts in a manner that can be managed apples to apples by using this tool. In other words, operators should reorganize their accounts so that they are properly categorized.

#2: Fleet Utilization Worksheet

The Chart of Accounts will help you get organized uniformly, and the Fleet Utilization Report will allow you to take it a step further and beginning reducing fleet costs.

As CTA reviews financials, the cost of fleet is commonly the easiest expense to reduce in a budget. If you look on the account descriptions sheet, you will know the cost of fleet encompasses depreciation, interest, repair and maintenance, insurance and fleet leases

If you are not producing $6,000 to $11,000 in per vehicle revenue per month, you cannot maximize profits in your business.

A good solution is to take your total monthly revenue and divide it by what your monthly revenue should be by vehicle ($6,000 to $11,000). Then, get rid of every vehicle that does not fall into this standard.

I know, I have heard every sentimental story in the book – it’s “my first vehicle,” or “my wife’s favorite.” The fact of the matter is if you don’t get rid of your excess cars soon you aren’t going to own them anyway.

CTA has created a “Fleet Utilization Report” to help operators in this area. The Fleet Utilization Report allows managers to track the progress of each vehicle in your fleet by the month, year and vehicle type (averages for all). This is a great tool for helping you make decisions about how many vehicles you need on the road. Think Bigger.

When you get rid of the vehicles, you also are eliminating maintenance, storage and insurance costs. If you give a dispatcher a vehicle, they will use it. If you take it away, they will be forced to improve the utilization of the other vehicles; therefore, taking the performance of your company to a higher level.

Additional Recommendations to reduce Cost of Fleet:

* Use farm outs before purchasing additional vehicles.

* Publish your expectations for monthly utilization so the dispatcher and everyone else know how much revenue is expected to be produced by that vehicle.

* Cycle vehicles in and out of production based on demand.

* Arrange for no payments during off peak times.

* Measure weekly and monthly.

By using both of these tools, you can be on your way to organizing your expenses uniformly (allowing yourself to be measured against the best) and reducing the costs of your fleet.

Charles Tenney is president of Charles Tenney & Associates. CTA specializes in business growth development, fleet subrogation, and mergers and acquisitions. For more information visit charlestenney.com.



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