When I open a new client’s books to look at net income, I usually see a rollercoaster. Huge profits on some months, alternating with huge losses on others. “I thought it was a great month,” the CEO will tell me. “I don’t know how we lost that much.”
It’s always a relief when I can explain to them: “You probably didn’t.”
A net income sheet that has more ups and downs than an amusement park usually means one thing: The company’s bookkeeper is not using GAAP – generally accepted accounting principles.
I won’t get into the weeds with that here, but 10,000 foot view: you need to match your revenue with your expenses (in accounting jargon, using the ‘accrual basis’), and you need to do it monthly.
What does that look like for a transportation company? One of the reasons why t&l companies will have such wild swings on their profit and loss statements is because of prepaid expenses – insurance payments, claims, fuel cards. If they just get booked when they are paid and don’t get matched with the proper period they cover, it will seem like one month is an incredible loss while other months are overly profitable. If this period crosses over two years, it can even impact tax liabilities, causing a company to under-pay one year and then over-pay the next.
Following GAAP is important for all businesses, but for the transportation and logistics industry, it’s a game changer to have clean financials on a monthly basis.
Here’s why: A rollercoaster is fun because it’s all about catching the rider off guard, surprising them with the highest highs, quickly followed by the lowest lows. When someone is interested in working with your business – whether it’s a potential customer, a buyer or a banker – they don’t want to invest in an amusement park.
A balance sheet with spikes and dips will:
- Worry customers
- Lead bankers to offer smaller lines of credit or higher interest rates
- Deflate potential resale value
GAAP financials make your business more transparent, which means:
- Customers are more confident relying on you for their jobs because they know you can handle a large job or pay out a claim
- Bankers will extend higher lines of credit and lower interest rates when they see prudent measures like reserves for bad debt as well as a healthy cash reserve
- Buyers will be more likely to offer top dollar and due diligence will go more smoothly, because there are no surprises
In addition to creating better relationships with customers, bankers and buyers, GAAP financials – prepared according to industry standards – will let you benchmark yourself against your competitors. Are your rates high enough? Are you spending the right amount on fleet maintenance? The only way to check on your income and expenses is through GAAP financials.
I know that plenty of well-run transportation and logistics companies do their bookkeeping in house. They may meet with their accountant once a year, which means that for eleven months they are on a cash basis. That might work for a smaller business, but if you want to grow, you can’t leave that much on the table.
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