Keeping hauliers on the road to success

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As Brexit looms on the horizon, the Road Haulage Association and the Freight Transport Association have both raised their concerns that a “no deal” Brexit could cause problems for haulage and logistics firms. But is Brexit really the root cause of issues with logistics businesses or is it more of a generic issue?

Background

Whilst Brexit has been cited as a potential issue for the transport industry, it is probably fair to say that even before the Brexit vote in June 2016 there were already issues with the industry. Haulage businesses tend to have very low profit margins; the industry is extremely competitive which leads to business owners looking to reduce their prices to keep their customers. Maintaining a stable level of turnover has been key for the industry however it is definitely a fair comment to say that rising costs have proved to be too much for a number of haulage businesses.

The increase in costs stems from a number of different areas; the industry is facing a driver shortage as it struggles to keep people in the industry, which unions are concerned about and the Road Haulage Association have issued a number of statements on the implications of a “no deal Brexit”, which suggests that the driver shortage will only be compounded if the movement of free trade is minimised. Staffing costs are not the only issue – one of the largest costs for hauliers is fuel and whilst there has been a freeze on fuel duty since 2011, and the 2018 Budget looks to maintain that freeze, there is no denying that inflationary costs will still be problematic for hauliers.

A steer to cleaner air

The environment, sustainability and climate change continue to be high on successive UK Governments’ agenda and bringing in measures to reduce nitrogen dioxide and improve air quality in the five worst areas in the country (Birmingham, Leeds, Derby, Nottingham and Southampton) by 2020 remains on track, with a further 38 areas also likely to be impacted in due course.

Leeds City Council have announced their Clean Air Zone plans this month, which would look to charge the most polluting vehicles, including lorries, up to £50 a day for entering the city. Whilst this can be a seen as a positive step for the environment, an increase in costs will no doubt have a negative impact on hauliers.

Obtaining an Operator’s Licence

In order to move goods, a haulier needs to have a Vehicle Operator’s Licence. Anyone applying for an Operator’s Licence is required to meet certain financial requirements, which are described in detail here. In particular, the Senior Traffic Commissioner, when deciding whether to grant an operator’s licence, has to be certain that the holder of an operator’s licence has the financial resources available to ensure that its vehicles are safe to use on public roads. The requirement to have the necessary finance available is continual throughout the term of the licence – it is not sufficient to confirm that the business has adequate financial resources at the outset; instead it must be able to demonstrate that it can access the necessary money to maintain its vehicles over a period of time.

Interestingly, the new guidelines suggest that a review of the financial position of a business seeking an Operator’s licence should not just concentrate on bank statements and accounts but instead look to make sure that there are no unpaid tax liabilities (PAYE/NIC or VAT) or other evidence of financial instability. In addition, the business applying should also have readily available access to financial resources; therefore if you have a healthy balance sheet but the majority of your assets are tied up in property, plant and equipment and the sale of those assets to raise additional cash would compromise the effectiveness of the operating business, such assets would not be taken into consideration in determining the level of available finance.

Therefore, whilst business owners may be keen to maintain turnover, the key to any business in the haulage industry will be maintaining their Operator’s licence, so may be this change will persuade operators that they need to concentrate on the bigger picture, rather than just sales.

Maintaining margins

Passing on costs to the end user is one way of ensuring that the profit margins remain consistent, however an increase in prices may not always be the easiest option in such a competitive market. Indeed, the Restructuring, Recovery and Insolvency team have found that business owners often concentrate on price and/or turnover to the detriment of their business.  It is a common trait amongst struggling logistics businesses that directors will say that they need to focus on maintaining their income, whilst not necessarily realising that the costs of running their business have increased to such an extent that they begin to make a loss. This is particularly prevalent for hauliers who bid for loads with other businesses, often undercutting competitors to maintain turnover, without thinking about the adverse impact on their cash flow.

Managing the cash flow is key

It is of vital importance that haulage businesses have adequate controls in place to ensure continued success, especially given the increased reliance from the Traffic Commissioners’ perspective on the availability of finance. Many haulage businesses will use invoice discounting facilities to aid cash flow and will therefore have some semblance of control over the debtor ledger (and therefore cash collections), but notwithstanding that, it is important that costs are monitored too. Ultimately, you have no control over fuel duty and associated costs, but you can structure your business to make sure that the costs are controlled properly.

In conclusion

Low profit margins mean that many haulage businesses are often close to the wire when trying to remain profitable. Whilst profit and cash flow are not the same thing, low margins can impact on the ability to meet payments as and when they arise, and it is therefore more important to ensure that sales are quickly turned into cash by keeping a close eye on debtor collections. If you are looking at replacing your fleet, you need to consider the impact of the finance costs on your cash flow position, and make sure that you are not paying too much interest on new agreements. And if you have any concerns about meeting your ongoing liabilities on time, please do not hesitate to get in touch!

As Brexit looms on the horizon, the Road Haulage Association and the Freight Transport Association have both raised their concerns that a “no deal” Brexit could cause problems for haulage and logistics firms. But is Brexit really the root cause of issues with logistics businesses or is it more of a generic issue?