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Bus and Motor Coach Library

It Looks Good On Paper - But?                 

Author – Brian Niddery (2001)

Every year as a dutiful and responsible fleet owner, you probably go through the same routine of reviewing your rates.  You analyze your costs and revenues for the preceding 12-month period, and forecast what cost increases you are likely to experience in the coming year - increases in fuel, insurance, employee, maintenance and so on. 

You confidently factor in all forms of expense, rolling (variable) costs, fixed expenses, and those "paper" costs that include capitalization and depreciation. 

You have a pretty good idea of the volume of business you are likely to generate, and finally you build in a fair profit margin.  The result is a fairly accurate financial forecast for the coming year that contains a reasonable profit margin.  From this information you are able to review and set a rate structure for the next 12-month period.

So how come what looks good on paper never seems to materialize at the end of the year?  Why does is it seem to be a perennial struggle just to make ends meet, and so difficult to turn a profit at year-end?  What looked good on paper at the beginning of the year, all but seems to disappear by the end of the year.

It lies in the day-to-day insidious pressures brought on by your customers, both old and new, to garner better price breaks from you, and in your own selling efforts to increase sales volumes.  It is a constant battle between your efforts to maintain your rates, yet keep a healthy flow of business coming your way. 

In this continuing battle, certain minor concessions are often made in price or in providing extra services at no charge.  Although these concessions may appear of no consequence on a day by day basis, when added up over the course of a year it can seriously erode that profit margin that you work so hard to build into your enterprise.   

There is a reason for the term "profit margin".  It is marginal at best!  And being a marginal factor at best, it can certainly dry up in a hurry.

Perhaps you might be interested in an exercise called a “revenue day net profit factor”.
If you were to take your annual forecasting one step further by determining the number of revenue days that your fleet will generate over the course of a year, you can easily determine what your profit margin is on a daily basis per fleet unit. 

You will likely find this to be a surprisingly modest figure. 

For example, suppose you have a fleet of 20 bus units, and each bus averages 200 revenue days per year.  Total revenue days would therefore amount to 4,000.  If your company profit last year totaled, say $100,000, you simply divide that figure by the number of revenue days.  In this mathematical example, the “revenue day net profit factor” would be $25.

As a bus fleet operator, it would be a very worthwhile exercise for you to determine what the “revenue day net profit factor” is in your operation.  It is likely to be a similarly modest sum as in the example above.  This modest net profit factor is what separates you from making money and no money at all!  

Your revenue day profit factor is really all the negotiating room you have.  And in your day-to-day sales effort, it becomes all too easy to give it away in a price break or by way of some other concession.  Even an innocuous giveaway such as providing a customer with a 10-hour day for the price of an 8-hour day will ensure that you will probably not make a dime; even though you are still taking on the responsibility, the liability, and incurring the costs of running that bus unit up and down the highway for an entire day.

Let me ask you a question!  If a stranger walked up to you and asked to borrow your private car, so that they can run it all over town for an entire day, in return for $25 bucks plus gas, would you lend it to them?  Not likely, right!  Then why is it so easy for a fleet operator to let out a bus unit, which is likely worth many times the price of one's car, for a similar sum of money! 

The question is, in your operation how often do you allow a customer to negotiate a slightly lower price, an extra service, extra hours, or some kind of volume discount in order to hang onto that customer, or to wrestle a new customer from a competitor?  How often are you tempted to accept a lesser rate just to keep those wheels turning? 

All of these are pitfalls that can seriously erode and even endanger your profit margin.

So check your net profit last year, figure out exactly how many revenue days your fleet generated last year, and from that you can easily determine your revenue day profit factor. 

That modest sum is all you have to work with!