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Welcome to our latest newsletter! I recently had a conversation with a fellow hauler who is looking to transition out of the truck and focus on growing their business. This is a significant step for any business owner, but it comes with challenges that need careful consideration. I want to share some insights from our discussion, as they may resonate with many of you facing similar decisions.
The High Costs of Growth
Growing a hauling business can be expensive. It's not just about adding more trucks, buying more dumpsters, or hiring more drivers; it's about ensuring your business is profitable enough to support these changes. Assets are expensive, and while new purchases have positive depreciation benefits for your year-end tax liability, they can severely dampen monthly cash flow. If sales don’t increase in lockstep with these new purchases, it can feel like you're drowning financially. When you decide to step out of the truck to work on your business, you need to account for an additional salary—yours. This means the business needs to generate enough profit and continue to do so to cover this expense without straining cash flow.
Understanding Cash Flow
Cash flow is the lifeblood of your business. Even if you're profitable on paper, cash flow issues can make it feel like you're not making any money. Daily operational activities—like paying employees, maintaining equipment, and covering unexpected expenses—rely on healthy cash flow. Without it, you could face delays in payments to suppliers (like transfer stations) or difficulties in meeting payroll, which can jeopardize your business.
Real-World Example: Imagine you’ve just purchased a new truck, 20 new dumpsters, and hired additional workers. While these assets will eventually pay off, the immediate impact on your cash flow can be overwhelming. You might find yourself scrambling to cover operational costs or even dipping into emergency funds. It could feel like you're going out of business even with consistent sales and profitability. What an insane feeling—I’ve been there.
"Beware of little expenses; a small leak will sink a great ship." - Benjamin Franklin
This happens because your profit and loss statements will still show positive net profits at the end of the month, but because assets are not expenses, payments to them don't impact your net income directly—they impact your cash flow. The interest on the loan to finance the asset and the additional insurance are included in your expense report and affect your net income.
For example, if you're making $20k per month with a healthy profit margin of 30%, your net income is $6k per month. Now, you buy a new truck for $2k per month, add insurance at $500 per month, and hire one or two workers for $4-$8k per month ($24 per hour).
Do the math:
Monthly Revenue: $20,000
Net Income (30% profit margin): $6,000
New Truck Payment: $2,000
Additional Insurance: $500
Worker Salaries: $4,000 - $8,000
Calculations:
Lower Range (1 worker at $4,000/month):
Total New Payments: $2,000 (truck) + $500 (insurance) + $4,000 (salary) = $6,500
Net Income After New Expenses: $6,000 (original net income) - $6,500 (new expenses) = -$500
Upper Range (2 workers at $8,000/month):
Total New Expenses: $2,000 (truck) + $500 (insurance) + $8,000 (salaries) = $10,500
Net Income After New Expenses: $6,000 (original net income) - $10,500 (new expenses) = -$4,500
Bottom Line Range:
Lower Range: -$500 (negative)
Upper Range: -$4,500 (negative)
If your business doesn’t increase and your profit margins stagnate, you’re now potentially not having enough money at the end of each month to cover expenses. And if you weren’t already calculating your salary in the business, you can certainly forget about paying yourself until this is straightened out. In this scenario, your net income after the new expenses ranges from -$500 to -$4,500, which means you would be operating at a loss.
Key Points to Consider:
Revenue Growth: Your new investments should lead to a noticeable increase in revenue. This could come from taking on more jobs, offering new complimentary services, or expanding your market reach.
Profit Margins: It's not just about increasing revenue; you need to ensure that your profit margins remain healthy. This means managing costs effectively while scaling up operations.
Cash Flow Management: Regularly monitor your cash flow to ensure you can meet all financial obligations. This involves forecasting cash flow needs and planning for potential shortfalls. Hire someone as needed if you can't fully wrap your head around this concept.
Strategic Investments: Each investment should be carefully planned and strategically aligned with your business goals. Avoid impulsive purchases that don't contribute to your long-term growth strategy. Don't grow for the sake of growing to try and show off to others.
Efficiency Improvements: Streamline operations to reduce costs and improve efficiency. This could involve adopting new technologies, refining processes, or optimizing your marketing strategy.
Ensuring Sustainable Growth
Transitioning from working in the truck to managing the business involves a strategic shift. Your new role should focus on activities that drive growth and expand margins. Otherwise, you're simply hiring to replace one of your daily activities, which comes at a cost of around $50k per year in most areas, not to mention additional payroll tax and workers' compensation insurance that will make you want to walk straight into oncoming traffic.
"The secret of change is to focus all of your energy not on fighting the old, but on building the new." - Socrates
Here are a few key areas to concentrate on:
Strategic Planning:
Develop long-term goals and actionable plans to achieve them.
Regularly review and adjust your strategies based on performance metrics and market trends.
Marketing and Lead Generation:
Invest in effective marketing strategies to attract new customers. It's an absolute must. We need to continuously replace the one-off customers or face the consequences. About half of the work in our industry is one-off jobs, making the cost of acquiring new customers vital to your bottom line (We use Google Ads for this and absolutely crush it averaging over 120 new customers per month).
Utilize digital advertising and community engagement to build your brand.
Operational Efficiency:
Streamline operations to reduce costs and increase productivity.
Implement technology and systems that enhance efficiency and service quality.
Financial Management:
Keep a close eye on your finances to ensure healthy cash flow.
Plan for taxes, unexpected expenses, and investments in growth opportunities.
The Risks of Ineffective Transition
If the transition is not managed effectively, you may face cash flow constraints that could jeopardize the business. Without a clear focus on growth-driving activities—making more money and specifically PROFIT (remember, not all revenue is created equally)—the additional monthly payments can become a major financial burden. This can lead to a situation where the business struggles to maintain profitability, forcing some to either try to sell or close up shop.
The Path Forward
Stepping out of the truck is a bold and necessary move for scaling your hauling business. However, it requires a strategic approach to ensure the business not only survives but continues on the path you paved over all these years. Focus on activities that drive profitability and growth, and always keep an eye on the financial health of your business. Work with an accountant/bookkeeper and check in with them regularly. If you're unfamiliar with how this behind-the-scenes business stuff works, get together with someone who does. Hire for your weaknesses, and play to your strengths.
Stay tuned for next week's insights, and keep hauling success!
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Got ideas or stories of your own? We'd love to hear from you! Reply and or share your insights with us in the Haulers Forum. Together, let's inspire and guide each other toward building businesses that aren't just successful today but poised for future success.
Justin Hubbard
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