To really understand the profitability of your towing business, you have to be clear on your expenses. Continuing on our Profitability Series, we will cover expense mitigation as Part 2. If you have not read Part 1, you can find it here.
The first thing we must do when we are analyzing our expenses is to identify what category each of our expenses falls under; there are Static expenses, and there are dynamic expenses.
Static expenses are predictable and do not fluctuate often; for example:
- Truck Leases
- Storage Yard Leases
- Office Facility Leases
Dynamic expenses fluctuate on a monthly basis; for example:
Reducing and Categorizing Expenses
Once you have identified all of your expenses, and what type of expenses they are it becomes possible to look at ways that you can reduce those expenses.
Static expenses are easy to identify, and determine whether or not you can reduce them.
Dynamic expenses are the Achilles heel of many businesses; we cannot always quantify, predict, or even identify what they are without a bit of work.
An easy way to start would be to start writing down every expense you can think of that you have in your business, and separate them into two columns; Static and Dynamic.
Once you have done that, you can look at each expense, and look at your options for cost reduction.
Let's take our example above, we are providing employees with phones, rather than a phone allowance. We can actually save money by providing an allowance, rather than providing them with a phone. Employees will take far better care of their own phone than one provided to them by you. And if it's their bill, they may not talk all day long.
Dealing with Shrinkage
A big problem in the towing industry is shrinkage; what is shrinkage?
When your drivers are doing work off the books
- Burning up fuel
- Wearing down your equipment without your business receiving compensation
- When equipment goes missing
Some towing companies deal with this by investing in a GPS solution that tracks vehicle location and PTO usage, which will allow you to catch the driver in the act of unauthorized vehicle usage.
But the downside of GPS solutions with PTO is they are expensive. Some towing companies have gone a different route; they allow their drivers to do some free, or at-cost tows to friends and family members, provided that they inform the manager/owner that they are doing them.
While the GPS option seems like the simplest one, the option for free or at-cost towing for family and friends creates goodwill between your business and your drivers.
Insurance and Loss Prevention
Another expense that you are able to look at is your insurance. If your company avoids using insurance for smaller claims you may want to look at changing your insurance policy, so that you can get a more affordable policy with a higher deductible rate.
Some towing companies keep a loss prevention account for each of their drivers.
If a driver
- Loses equipment
- Has an at-fault incident
it gets paid from the loss prevention account. If you have to take from the loss prevention account in any way, the deduction from commissions occurs until there is a sufficient balance once again.
The loss prevention account is a solution for both Shrinkage, and your higher insurance deductible, but the downside of this is that it does not build good will with your employees. The upside of this is that your drivers tend to be a bit more conscientious of the way that they are performing, because it can result in a direct loss of their loss prevention funds.
If a driver leaves your company, the funds from their loss prevention account are dispensed to them, giving them a form of severance while they look for another job.
There are many ways that you can trim down expenses; some work better than others, but the biggest issue we need to look at, is that we do not chase away our employees by creating a hostile atmosphere.
Cost of lost Opprotunities
Retraining new drivers is an expensive thing to do, and if you have a high turn-over rate in your company it costs you a lot of money.
This opens the issue of the cost of lost opportunities. When you have more trucks than drivers, and there is work that you could be doing, but don’t have the staff to do the work, that is lost profit.
If you have a high turn-over rate in your business it may be time for you to take a step back and review your company policies, and to review how you are treating your employees. A good resource for better understanding management theory that really works is a short book called Leadership and Self Deception, by the Arbinger Institute.
If you are paying your drivers on a commission based system, or a hybrid of commissions and hourly pay you may need to look at the volume of motor club calls that you are handling, and pursue other business as well; drivers don’t often make respectable commissions from motor club towing, yet the work is just as difficult and exhausting. Motor Club tows are often the least profitable for you and your drivers, so make sure you have a healthy balance of sources of towing jobs.
In this article, we are covered how you can categorize your expenses and deal with them more effectively. In the next article, we are going to cover how to determine your average cost per mile on your trucks, and how to calculate your average cost per call.
I’m confident that we have only brushed the surface of a few expense management tips in this article, and I am open to feedback, so don’t hesitate to leave your comments below with any ideas that you might have to improve employee relations, and expense management!
I hope that you are looking forward to reading the next article as much as I am looking forward to writing it!