If you have spent your career driving trucks and now own a trucking company, financial management may not be your strongest skill. Whether you have a good understanding of finances or just a basic knowledge, the most important thing to understand and manage is your operation’s working capital in order to support your trucking business. Sometimes referred to as operating capital, working capital is the life blood of your company. Working capital pays the bills and sustains your trucking operations. Knowing how to calculate net working capital and being financially prepared is essential to the success of your trucking business operations. What Is Working Capital It is important to know the difference between gross working capital and net working capital. Gross working capital is a measure of the company’s total current* assets. Total Current Assets of any business are financial resources such as cash and accounts receivable, plus any short-term investments and securities. Gross working capital does not take into account financial obligations; liabilities such as account payables, payroll, debt, etc., and therefore only provides a limited picture of a company’s financial standing. Net working capital provides a more complete picture as it takes into account both your current assets and current liabilities. By calculating your net working capital, you are able to determine your company’s ability to meet all its financial obligations. *The term “current” refers to 12 months, so as long as you have enough cash coming in over the next 12 months to pay for all the expenses during that same period, you have enough working capital. Business Profit vs Working Capital: The Truth is in The Balance Sheet You may look at your trucking company’s income statement (a.k.a. trucking company profit and loss statement) and see that you have more revenues than expenses. Excellent, the company is making profit, but where is it? Most often, the profit of the company is tied up in accounts receivable which have not yet been collected. That is why to truly understand the financial health of your company it is important to look at your company’s balance sheet. Your trucking company’s balance sheet details all current assets and all current liabilities at a particular point in time. By analyzing your company's balance sheet you will gain a better perspective of where your business actually stands. A balance sheet provides a snap shot of current accounts and will reveal the impact of revenue terms that delay the collection of accounts receivable. What is considered profit is not real nor useful until invoices are paid and the money is in your business bank account. How Calculating Net Working Capital Can Save Your Trucking Business Calculate working capital regularly to tell whether you have enough assets converting to cash (over the short term) compared to the financial obligations that you have to pay. The benefit of calculating working capital is that it will allow you to determine if you are heading into a “Cash Crisis” even though you are running a profitable trucking company. A balance sheet will detail all the current assets and liabilities needed to do the calculation. This calculation of current assets (assets that will convert to cash within 12 months) vs current liabilities (things that you will have to pay within 12 months) is termed “the Working Capital Ratio”. Successful companies should maintain a ratio ranging between 1.2 and 2.0. If your working capital ratio is 1.2 this would mean that you will have $1.20 of cash to pay for every $1.00 you have to pay out. Determining your company’s Working Capital is a simple formula/calculation: Current Assets – Current Liabilities = Working Capital Example: $50,000 (Current Assets) - $24,000 (Current Liabilities) = $26,000 (Working Capital) Working Capital Ratio Formula: Current Assets / Current Liabilities = Working Capital Ratio Example: $50,000 (Current Assets) / $24,000 (Current Liabilities) = 2.08 (Working Capital Ratio) In the above working capital calculation example, this trucking company has a positive working capital of $26,000.00 to sustain operations and continue to operate the business. Its working capital ratio of 2.08 indicates that this is a healthy business with sufficient liquidity to meet ongoing financial responsibilities. Your Current Assets are the Key to Business Operational Success Your assets may include; accounts receivable, prepaid expenses, securities and other such items. For trucking companies, among the most valuable of these assets are the Accounts Receivable Invoices. All trucking companies offer their customers a credit period that may vary from 30 to 60 days. In some cases, this period gets extended to 90 days or more. Meanwhile, your trucking company needs to pay its ongoing costs of fuel, payroll, overhead, taxes and more just to keep trucks rolling and pulling freight. This gap between outgoing expenses and incoming revenue is the main source of financial strain for a majority of trucking companies. For this, ongoing liquidity is a major factor. If this sounds familiar factoring your invoices for immediate cash solves can this problem. Or consider checking out our Accounts Receivable checklist to help expedite your accounts receivable collection process. Factoring Converts Invoices to Cash When It’s Most Needed … Every Day Most trucking companies experience cash flow challenges at one point or another and find themselves in a tight spot if customers delay payments. This common problem may lead to insufficient funds to sustain ongoing operations. It is estimated that 15-20% of all trucking companies utilize the services of a factoring company to improve accounts receivable management and cash flow. The most successful of these businesses choose a factoring company that understands the transportation industry and provides real value to support your company’s bottom line.