Operations

Top Performers Excel Across Their Businesses

Martin Romjue
Posted on January 31, 2020
Jim McCann, a motorcoach expert at Spader Business Management, holds a roundtable on peak performance for motorcoach companies during LCT East on Nov. 4, 2019 in Atlantic City, N.J. (LCT photo)

Jim McCann, a motorcoach expert at Spader Business Management, holds a roundtable on peak performance for motorcoach companies during LCT East on Nov. 4, 2019 in Atlantic City, N.J. (LCT photo)

ATLANTIC CITY, N.J. — Keeping a high performing motorcoach service goes far beyond accurate finances, although the numbers are always the final indicator of success.

To achieve a profit margin well above average, operators have to strive to improve all aspects of an operation, including pricing, customer service, marketing, employee culture, values;  the list can be long, but for business owners who connect the dots, they can enjoy higher profits amid all seasons and challenges.

Jim McCann, a consultant with Spader Business Management and a host of peer-to-peer 20 groups in the motorcoach industry, took a detailed dive into that broader picture during the LCT East Show Nov. 3-5. He based his presentation on the accumulated findings of the 20 groups he hosts and advises. About 60-70 bus operators shared their financial data with their groups as part of the analysis he presented to attendees.

What Makes A High Performer?

McCann compiled that information in a way to identify stats and trends among three key segments: Average motorcoach operators, the top 20% or fifth, and the bottom fifth.

“From an economic point of view, if you want the family to stay together, we need to make money,” he said, referring to the livelihood of motorcoach operators. But success is defined both by finances and the fulfillment derived from a clear mission and the satisfaction of doing well at a job you enjoy.

He broke down the components of the typical operation into four quadrant business model, with the first centered on financial strength and profits, the second on customer base loyalty and growth, the third on people productivity and morale, and the fourth on navigating economic forces and business trends.

Asset management is the foundation of the quadrants, also called the “business pyramid,” McCann said. Operators need to be strong asset managers. “We have to have internal processes and systems, financial analysis, benchmarking, budgeting, and an organizational structure that can support the company’s financial goals.

“High performance financially is only sustainable if we have a great organization and great culture to support that.”

Quadrant One: Financial Strength And Profitability

High performing operations build a budget and profit plan. A budget is defined as the best ideas put on paper that form the basis of the income statement each month, which is a scorecard. It reflects a company’s ability to execute good ideas. Those all need to be followed by projections.

“The top 20% of our 20 groups all subscribe to those three things (budget, income, and projections),” McCann said. “Our ability to project what the rest of the year looks like allows us to adjust. Those adjustments are critical and need to be identified early so we can replicate them throughout the year.”

Spader recommends listing all expenses and revenue, dividing the budget into departments or components so the bottom profit line stays clear.

“High performing organizations always look at their tours versus their bus revenue departments and identify if these tours are really making money or not,” McCann said. School buses and motorcoaches are examples of departments a budget could include.

“The departmentalization really allows you to fine-tune and go deep into your organization to take a look at how you're performing,” McCann said. “The most important piece of that is everybody in your organization needs to look at that scorecard or income statement and reach the same conclusion.”

Profit planning is more than just budgeting, McCann said. “It's about saying, ‘I need to get more revenue when I have the capacity to do it.’ We don't need to add more coaches to get more revenue. We need to say, ‘how do we drive business when I have the capability to drive that business?’ And that's what profit planning is all about. The numbers end up being the numbers based on the ideas we have.”

Numbers operators need to monitor each month include: Net cash position, receivables, total cash, revenue per day, direct coach expenses, fleet usage, and debt to equity.

Throughout the presentation, McCann reviewed detailed budgets and P&Ls of motorcoach operations that are Spader clients. He offered the following financial insights and principles based on the data he shared with the audience:

  • Gross margin dollars are gross revenue minus the cost of goods. The cost of goods in a tour operation, for example, would be anything that goes along with the price of the tour.
  • Measure your expenses against gross margin as opposed to expenses to sales. If top operators are spending 41% of their gross margin dollars on personnel, that becomes a benchmark that can be measured against our gross margin. “We have a common benchmark and look at a business regardless of how that revenue is generated.”
  • Personnel expense includes all directed personnel expenses plus what is called OPE, which is other personnel expenses. Variable expenses are broken down among equipment maintenance, transportation, and other variable costs.
  • Fixed expenses include equipment, financing, and other allocated costs.
  • He cited the ratios for average or typical performers: 35% of their available income is spent on personnel; 22% on variable expenses; and 18% on fixed expenses., leaving 25% for other costs, taxes, etc. After other expenses and deductions, that results in a leftover net profit of 10% for the owner(s) to subsist on. “We call that a survival net. We know you need to keep 10% of your available income to survive. That's not growing.”
  • For 2018, average performers had a net of 9.2% in 2018, just below the survival benchmark. The top fifth most profitable came in at 23%. The bottom last about .3%, just barely above break even.
  • High performers spend 36% of available income on personnel, including direct wages and OPE; 7% on equipment maintenance; 12% on transportation; 5% on variables; 9% on equipment financing; and 8% on other fixed expenses.
  • Operators are facing increases in personnel expenses. Direct wages have increased by about 5%, while the OPE, such as health insurance and 401(k)s, have risen almost 21%. “Some of those things are not as much in our control as we'd like to have them but still, a great percentage of it is within our control.”
  • Technician wages are likely to rise given the demand for such highly skilled positions, and drivers are still hard to find.
  • Typically, the top 20% of operators will have a fleet usage rate of about 52-53%, meaning a bus goes out at least eight hours per day, either continuous or split hours. High performers have usage in the mid-50%s with daily revenue of about $1,200 to $1,300.

Quadrant Two: Sales & Pricing

In this section of the business model, operators concentrate on three key parts: Creating a marketing plan, pricing strategy, and sales process.

“In the motorcoach industry, sales and marketing isn't the strong suit,” McCann said. “We really need to be diligent in working at that. The high performers in our 20 groups really challenge themselves to create a culture of sales.”

A marketing plan becomes a sales one as well, focusing on specific and potential client groups and how to approach them. “A marketing plan targeted with results or a results-based marketing plan is an important component I see in our top 20%.”

On pricing, high performers closely analyze demand by day, week, and month, and vary prices based on expected volume. Busy days command full or market rates, while slow days warrant some discounted pricing.

“What we teach is keeping a cost line. Cost line is the true cost of getting a product delivered including the payment and all direct and indirect expenses which occur, plus an additional amount required for business survival and continuation. It’s understanding what the trip costs and then taking your direct expenses on top of that in your pricing and creating that model. Below cost line, those rates are based on acceptable gross margin when demand is at its lowest. Above costs line, rates are based on gross margin expectations during the peak.”

During peaks, operators sell the vehicle for as much as possible. “The real trick to high performance is taking that same pricing strategy and understanding it's the below cost line where you can make your money. Because if we know how low we can go and still make money doing it, and we want to fill those low months when we have capacity when our usage is lower, that's where we have an opportunity to really go in and change the seasonal trends of the business. That's what I see that our top performers are doing on a regular basis.”

McCann has found too often motorcoach operators miss out on closing many sales because they don’t follow through on rate quotes and inquiries. Operations need to hold employees accountable to the sales process and get over the reluctance to ask for the sale and follow up.

“You have to identify what that system looks like in your organization, follow up on that, and manage it on a regular basis. Right there is where you have an opportunity to really improve the organization from a sales point of view, but most importantly, from a profit point of view.”

Quadrant Three: Culture & Job Roles

This area revolves around, culture, organization structure, and plateaus, defined as stages of company growth and success based on revenue, fleet size, and personnel.

Sustaining high performance depends directly on the company’s culture and the people in it. In terms of the bottom line, high performers generate about $111,000 of available income or gross margin dollars per full-time employee; the average operator draws about $92,000; and the bottom fifth, $89,000. An operation needs to generate enough income per person to keep the right ratio of revenue to personnel expenses. If an operation is spending 45-47% or more on personnel with available income per employee of $80,000, it has too many people.

To balance the equation, the company must focus on its essence, or culture, McCann said.

“Why are you doing what you do? It's got three components, the mission, which is the purpose of your business; your vision, the ideal end state of your company; and the core values. When you understand your values as an organization, it makes our work a lot more effective. Culture defines who you are and who you intend to be. It's based on those driving beliefs and principles which describe what your organization is really like.”

A company that wants high performance must use its consistent values and goals to align its mission in the same direction, he said. “What I see is those folks who are consistently in the top 20% take this to heart. They know the difference between leadership and management.”

Loyalty, trust, excellence, stakeholder success, and financial stability are examples of values among top performers that provide a framework for decision making. An organizational climate accounts for 20% to 30% of business performance, McCann estimated.

The plateaus or stages of a company fall among certain markers of growth, such as a start-up new phase. Plateau three, for example, is where you first add department managers and increase delegation in the company. McCann recommends using a plateau map to indicate what positions and duties should be added at certain shifts in plateaus or benchmarks, provided those positions and divisions of labor can be sustained by finances.

“Think about how to run your organization not based on who you have, but what the organization needs and develop your structure that way.”

He also recommended the use of KRAs (key results areas) for various job descriptions that identify the top two or three results wanted from that position.

“We've got a lot of 20-group members who are in the top 20% who use that exact system and we have a lot of them that use a hybrid. We have a lot of them that don't use that system at all, but something else.

“Work direction is critical if you want a good organizational structure and a good plateau. The top performers understand when they need to be a manager and when they need to be a leader and what the difference looks like. So KRAs are an important part of creating that culture.”

Quadrant Four: Planning Ahead

McCann also advised participants to develop strategic planning to respond to business, economic, industry, technology, and demographic forces that can alter even the best-laid and most thorough plans.

Aside from recessions and booms, operators must deal with periodic challenges such as broadly higher costs for insurance or equipment, and trends such as driver shortages. McCann finds many operators are spending a lot of money on new technology but looking at how they can use it to its fullest potential.

“This is an industry that's really in a lot of change right now,” he said. “It is consolidating at a faster growth than I could imagine. It won't be the same industry in three years. It will look completely different. How does that affect your organization? You need to be thinking about those things from a strategic planning point of view.”

Related LCT article: A Detailed Primer On Motorcoach Finances

Related Topics: 2019 LCT East, finance, financial planning, industry consultants, industry education, LCT Events Education Series, motorcoach operators, motorcoaches, profits

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