Compliments of Marvin Johnson & Associates 2007
Leading you down the road to safety
Compliments of Marvin Johnson & Associates 2007
Many trucking companies still seem to think of the safety department as a drain on the bottom line. They see the money that goes out of the department but do not recognize the true benefits. These companies may even think of DOT fines as just a cost of doing business. The old school way of thinking that you can make up for the lack of a solid safety program by simply running more miles has never been true. Spending money in order to save money may not sound like a logical tactic, but the business savvy trucking companies of today are starting to figure it out. In this article we are going to show you why the old way of thinking does not make sense OR cents!
The primary objective of the safety department should always beto keep people from being injured or killed. But for the purposes of this article we are going to look at things strictly from a dollars and cents perspective. Other than protecting people, a good safety program protects the profits that the company is able to generate. It protects these profits by reducing costs due to accidents, injuries, insurance premiums, driver turnover, down time, fines and penalties, out of service violations, freight claims, and many other drains on the company’s profitability.
We are all familiar with the equation profit = revenue – expenses. This is a simple equation, but too many people in the trucking industry tend to focus most of their attention on the revenue side. One major downside of placing too much focus on the revenue side of the equation is that there is only so much room to go up. Freight rates have been mostly stagnant for over a decade, so if you try to increase your rates too much you price yourself out of the game. Many carriers try to generate more revenue by running more miles, but there are limits there as well. Too many miles will eventually lead to more accidents, out of service violations, fines and penalties, higher insurance premiums, and a whole host of other potential problems that translate into increased expenses.
Let us take a closer look at what we know about profit, revenue, and expenses. We know that for every dollar of revenue generated there is a cost associated to generate that dollar. The trucking industry is notorious for slim profit margins. The average trucking company has an operating ratio of somewhere between 92% and 98% which means that for every dollar generated in revenue the carrier has to spend 92 to 98 cents in expenses. For example purposes and to keep the math simple let us assume that you are way above average and have a 90% operating ratio. That means for every unnecessary $1 you spend you must gross $10 to make up for that cost! If that sounds like a lot of work it is because focusing on the revenue side of the equation is the hard way to increase your profits. It is like trying to fill a bucket up with water that has a hole in the bottom of it.
Safety primarily focuses on the expense side of the equation. Here is the wonderful part of the expense side of the equation, if you are able to save $1 in expenses that is $1 right back into profit. Wow, isn’t that so much easier than having to make $10! The more you cut your expenses the smaller the hole in the bucket becomes. Using the same 90% operating ratio from the previous example, if the company receives a $5,000 fine from a DOT audit they would have to generate $50,000 in additional revenue just to make up for the fine. Another way to look at it would be if you received a $25,000 reduction in insurance premiums it would have the same effect on profit as generating $250,000 in additional revenue. The numbers used in these examples are small compared to the true cost savings (a.k.a. profit protecting) potential of a solid safety department. We could easily come up with costsavings into the
hundreds of thousands of dollars for a good sized fleet. As you are able to save more and more money another benefit appears…your profit margin increases. SO for dollars that are spent in the future you do not have to generate as much revenue to offset the cost.
Take a look at the chart below to see various scenarios and how much money would have to be generated in order to make up the cost. To use the chart, first find your operating ratio in the far left column. Then choose a dollar amount from the top row. Where the two lines intersect is the amount of revenue that would have to be generated in order to offset the chosen dollar amount.
Operating Ratio / $100 / $500 / $1,000 / $2,500 / $5,000 / $10,000 / $25,00099% / $10,000 / $50,000 / $100,000 / $250,000 / $500,000 / $1000,000 / $2,500,000
98% / $5,000 / $25,000 / $50,000 / $125,000 / $250,000 / $500,000 / $1,250,000
97% / $3,333 / $16,667 / $33,333 / $83,333 / $166,667 / $333,333 / $833,333
96% / $2,500 / $12,500 / $25,000 / $62,500 / $125,000 / $250,000 / $625,000
95% / $2,000 / $10,000 / $20,000 / $50,000 / $100,000 / $200,000 / $500,000
94% / $1,667 / $8,333 / $16,667 / $41,667 / $83,333 / $166,667 / $416,667
93% / $1,429 / $7,143 / $14,286 / $35,714 / $71,429 / $142,857 / $357,143
92% / $1,250 / $6,250 / $12,500 / $31,250 / $62,500 / $125,000 / $312,500
91% / $1,111 / $5,556 / $11,111 / $27,778 / $55,556 / $111,111 / $277,778
90% / $1000 / $5,000 / $10,000 / $25,000 / $50,000 / $100,000 / $250,000
At Marvin Johnson & Associates, our in house safety and loss prevention staff are here to assist you in building a quality safety program that will protect your company’s profits. We have many resources available that can be customized to fit your company’s specific needs. Contact us today to see how we can assist you. After looking at some of the different scenarios hopefully you are starting to realize the profit increasing power of a good safety program. Safety pays by working smarter rather than harder. If you take a look at most of the companies that lead the industry in profitability you will see a definite trend – they have realized how safety pays. It just makes cents.
Compliments of Marvin Johnson & Associates 2007