By Bill Pifani
Editor’s note: Written by Bill Pifani, director of credit management, TD Equipment Finance. This is one in a series of periodic guest columns by industry thought leaders.
Economists are just beginning to sound the first warnings that a recession could be ahead. A survey of chief financial officers by Duke University found that nearly half believe a recession could set in by the end of this year, and more than 80 percent think a downturn could hit by the end of next year.
It’s bound to happen as the current economic cycle of growth is one of the longest on record. A slump of any severity will impact the trucking industry, as we saw significant downsizing during the last recession. That’s why those in the industry, from independent truckers to the large motor carriers, need to start thinking and planning now for how they will survive the next recession.
Trucking companies must take action to strengthen balance sheets, maximize cash flow and assess and manage costs. That’s how trucking companies can successfully endure – and perhaps even grow – in the eventual downturn.
CONFRONT POTENTIAL CHALLENGES
Recessions reduce truckloads and lower freight rates, revenues and profit margins. Businesses are likely to downsize. By looking closely at expenses, as well as product offerings and fleet and personnel needs, trucking companies can proactively prepare for these trends.
Because most cost structure is fixed, upcycles present the opportunity for capacity and growth. In a downturn, it becomes extremely important for trucking companies to manage arbitrary costs. By assessing the condition of fleets and conducting a cost-benefit analysis, companies can determine the financial implications of replacement and maintenance costs.
With the expected downturn, it’s imperative for trucking companies to understand how to keep drivers motivated to proactively manage driver attrition. By evaluating their people strategies prior to a recession, companies can ensure they have the right number of people in place to manage business objectives.
To remain profitable, it’s important for trucking companies to have a diverse segment and geographical portfolio, as industries subject to discretionary spending, such as retail and automotive, are likely to see a decline during a recession. By evaluating portfolios and expanding into less cyclical industries such as food and beverage, companies can solidify product offerings and maintain revenue streams. Account assessments should be conducted to determine which contracts have slim margins. Trucking companies are then in a position to renegotiate, trim or eliminate contracts and pursue new, favorable relationships.
EQUIP FOR FLEXIBILITY
With the uncertain economic outlook ahead, it’s important that trucking companies ensure their capital structure allows for financial resilience. By optimizing balance sheets and enhancing operating flexibility, companies can persevere through unknown challenges and seize potential opportunities.
To maximize cash flow, companies should examine how suppliers are paid and confirm contract terms. By securing terms upfront, shortened payment terms that may accompany an economic downturn can be avoided.
To maintain profitability, trucking companies need to have a holistic understanding of their expenses, investments and revenue. For companies that are part of a labor union, excess costs can be avoided by negotiating pending union contracts.
In an era of economic uncertainty, it’s paramount that trucking companies searching for financing solutions explore options that offer a combination of flexibility, convenience and competitive pricing.
Companies typically prepare for a recession by cutting costs. But to remain competitive, it’s important to look at areas of investment and prioritize which are necessary, which can be deferred and the impact of those investments on their financial flexibility. Investments in technology lead to increased efficiencies, while investments in new fleets often directly correlate to higher margins. If a company is determining whether to invest in a new fleet or acquire other capital equipment now or in the future, it’s imperative to evaluate current financing costs versus potential financing costs during a recession, when capital is likely to be limited and more expensive.
UNDERSTAND FINANCIAL OPTIONS
In an era of economic uncertainty, it’s paramount that trucking companies searching for financing solutions explore options that offer a combination of flexibility, convenience and competitive pricing. Unlike purchased equipment or equipment financed through loans, equipment leasing offers the flexibility necessary to provide customized financing solutions that provide low monthly payment options, and it does not require an upfront use of cash.
Trucking companies that want to purchase equipment at the end of the lease term at a predetermined residual amount can do so with a terminal rental adjustment clause, or TRAC, lease. A split TRAC lease offers comparable features, but is an off-balance sheet form of financing that limits the lessee’s exposure to a portion of the equipment’s estimated residual value. A fair market value lease provides lessees with broader options at maturity to return, re-rent or purchase the equipment at its then-market value.
Alternatively, a sale lease-back is a great option for trucking companies that need to free up the cash invested in their equipment but need to retain those assets for day-to-day operations. By selling the equipment and leasing it back, companies can proactively enhance operating flexibility. Due to the longer useful life, another great option is to refinance existing rolling stock equipment and consolidate debt.
EXPLORE SMART EXPANSION
Although this appears counterintuitive, an economic downturn could present an opportunity for growth for companies with balance-sheet flexibility. Opportunities may exist to acquire truck assets or new contracts from companies that encounter financial difficulties. In this instance, trucking companies should assess their product offerings to determine if there is an opportunity to expand in certain sectors or geographies that align with their business strategy and provide additional revenue or stability.
Although a prolonged downturn in the business cycle presents many challenges for trucking companies, preparation and careful management of operations and financing needs can help companies successfully overcome the slowdown and emerge in a commanding position.
Editor’s note: Bill Pifani is director of credit management for TD Equipment Finance. His career includes 20 years of equipment finance and financial services experience.