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Analysis: Transportation Industry Financial Ratios and Trends 2020

BlogEnterpriseYour business By Duncan Khoury – 14 April 2020

While Australia is under varying levels of lockdown nationwide, the transportation industry continues to play a vital role in our economy. Supply chain logistics are the backbone of our whole community – a fact that’s starkly illustrated in the current environment. 

But does that mean transport companies are automatically profitable? 

To be successful, all businesses within the transportation industry need to analyse and understand their financial statistics and ratios, including:

  • gross and net profitability
  • turnover ratio
  • return on investment (ROI).

They also need sufficient working capital to weather the periods between supplier payments.

So what’s the most effective way to get a handle on those key metrics, and ensure good levels of working capital? Let’s take a deeper look at the transportation industry and its unique characteristics and challenges.

The importance of road freight: Australian transport industry statistics

Just how important is the transport industry to the Australian economy right now?

Back in November 2017, the transport, postal and warehousing industry accounted for 5% of total Australian employment. Within that figure, the road freight sub-industry accounted for the majority of workers.

That number was projected to grow to 7% over the next five years, based on the conditions of the time.

Meanwhile, a 2017 Australian Industry Standards study showed 84,635 businesses in the Transport and Logistics Industry, with a combined revenue of $96.65bn.

And by 2019, the road freight sub-industry accounted for 48,399 businesses, ranging from single truck operators through to large multinational companies. This $47bn market employs approximately 142,808 people.

In other words, road transport is a vital part of the Australian economy, even under normal circumstances. The staples of life, such as food and beverages, will always need to be transported – now, more than ever.

And particularly here in Australia, with our geographical challenges and lack of viable alternatives, road freight will continue to be a critical industry. 

Transport industry financial considerations

The transportation industry covers both long-haul road freight, such as between capital cities and regional areas, and ‘last-mile delivery’ options like couriers. 

The long-haul sector involves fewer vehicles, less labour and bigger loads than last-mile delivery. However, the key challenges for businesses in both sectors are similar: 

  • understanding their existing key financial metrics
  • identifying how to improve those numbers to become more profitable.

Below are three of the key factors to consider as you examine the numbers for your transportation business.

Financial ratios

Financial ratios are a valuable tool to help you compare your business with either the overall transport industry, or specific goals you might have established. They’re also useful for identifying business trends and assessing your business’s overall financial strength. 

Performance benchmarks from the ATO road freight figures provide a good reference point to compare your business against the transportation industry as a whole.

Key benchmark range

Annual turnover range

$50,000-$200,000

$200,001-$600,000

More than $600,000

Total expenses/turnover

54%-72%

68%-82% 83%-92%
Average total expenses

63%

75%

88%

Non-capital purchases/total sales

37%-54%

44%-59%

50%-64%

Labour/turnover

23%-37%

17%-29%

23%-34%

Motor vehicle expenses/turnover 13%-26% 9%-28%

4%-24%

Break-even costs

Smart operators know their costs, and always make sure their trucks are making money while on the road. It’s not enough to take on any backload job – you need to ensure that every contract you accept will work out to be profitable.

To assess whether a given contract will be profitable or not, one of the most important metrics you need to identify is the job’s break-even cost. Understanding this will then help you to estimate exactly what you should be charging per kilometre. 

When you calculate your break-even cost for a particular job, factor in costs such as:

  • truck financing
  • maintenance
  • consumables (e.g. fuel and tyres)
  • labour 

Ideally, an external accountant or trusted advisor who understands the business will regularly update and analyse these costs across the wider business for you. They’ll help you to understand your current profit margin, and the factors that influence it. Once you know that, you’ll have a better idea of what you need to change to improve that margin.

It’s true that the current climate means transportation companies benefit from:

  • more deliveries to people in isolation
  • increased online shopping
  • extra distribution runs

However, many businesses in the industry need access to extra cash flow to take advantage of those growth opportunities.

Octet’s Transport Industry solutions: the power to keep moving

The transport industry is generally undercapitalised, and the current climate will only add yet more strain to the sector. The good news is that Octet provides working capital solutions for the transport industry to keep businesses on the move.

Octet’s primary solution to relieve cash flow strain is our Debtor Finance facility. Debtor finance lets you fund your business using your largest asset – your accounts receivables. 

In the transport industry, invoice payment terms are often stretched out to 30 days – or in extreme cases, up to 75 days. That’s a long time to wait for a payment you need to cover your everyday costs, and can make your business feel seriously stretched.

Our Debtor Finance helps by financing up to 85% of the value of your unpaid invoices within 24 hours. 

Let’s say you have an invoice worth $100,000. With Debtor Finance, we make up to $85,000 of that available to you within a day, so you have the cash to run your business. Then, when your buyer pays their invoice, we give you the remaining balance, minus a fee.

We calculate the amount available in our funding facility across your entire receivables ledger, up to your approved limit. That means you constantly have money to draw on. This helps to smooth out your available cash flow across the normal ups and downs of trading.  

Other advantages of our Debtor Finance solution include:

  • It’s an unsecured funding facility: this means we don’t need your personal assets as security. 
  • The funding limit grows with your business: the larger your invoices, the more funding you can generally access.
  • It’s flexible: you can either use it as your main funding source, or as a top-up.

Our Debtor Finance suits transport businesses that range from newer companies to those that are well-established. Ideally, we like to see a turnover of at least AUD 1 million, with 1-2 years of business experience (that said, if you’re turning over AUD 500,000 or more, let’s have a chat – we may be able to help).

You can also use Debtor Finance as part of a combined solution with our Supply Chain Accelerate or Trade Finance facilities.

Power your growing business with Octet’s finance options

Debtor finance is just one way you can give your transport business a working capital boost, but we also offer other finance solutions that may suit your operation. 

Talk to us to find the best option to power your business growth.