As a broker, you need to be able to analyze the efficacy of the shippers and carriers that you employ. There are a number of methods for doing this, but in this post, we’re going to evaluate how accounting is one of the most effective tools toward meeting that goal.
Typically when we think of accounting, we think purely in terms of raw financials. The most common terms in this area are revenue, expenses, profits, and losses. However, accounting measurement is a blend of data that you can use in many ways to evaluate the operational success of your business.
Let’s take a closer look at accounting measurement and what it means. Later on, we’ll discuss how you can apply it to shippers and carriers. Finally, we’ll examine why accounting measurement is effective.
What Is Accounting Measurement?
You most likely think of accounting in terms of plain cash. You consider how much cash you earned and how much you spent. However, you can also use accounting for many forms of measurement. Any profitable company needs to track a variety of metrics in order to be successful. Accounting measurement is a tremendous tool that helps accomplish this.
Here are some of the most common metrics that you can track through accounting measurement:
- Cost of labor
- Number of jobs created
- Alternate currency
- Hours worked
- Number of units sold
- Revenue per unit
Next, let’s look at how accounting measurement operates.
How Does Accounting Measurement Work?
Let’s take a moment to address the mechanics of accounting measurement. This will be important to understand before applying the concept directly to shippers and carriers. So, let’s take a look at a couple of examples.
Let’s say we have two companies to measure. We’ll call them Company Alpha and Company Beta. Now let’s say that each of these companies generates $100,000 of sales revenue per month. Company Alpha achieves this with five salespeople. However, Company Beta meets this number with 10 salespeople. This indicates that Company Alpha’s sales team is much more skilled at selling. They’re generating $20,000 per month per salesperson. In contrast, Company Beta is averaging only $10,000 per month per salesperson. This is a form of accounting measurement. It’s telling us that, for some reason, Company Alpha’s salespeople are twice as prolific as Company Beta’s.
Let’s stick with Company Alpha and Company Beta for our second example. I’m also going to use the same numbers from example one for simplicity’s sake.
So, each company generates $100,000 of sales revenue per month. We’ve established that we believe Company Alpha’s sales team is more productive than Company Beta’s. However, we could now change how we’re measuring that revenue. Rather than taking a look solely at the number of salespeople, let’s look at the total number of employees.
Company Alpha has 50 total employees, whereas Company Beta has only 25 total employees. Now, this shows us that Company Alpha is generating $2,000 per employee. However, Company Beta is generating $4,000 per employee.
We’ve changed what unit we’re measuring through accounting procedures. This gives us two very different looks at these companies, depending on the data we choose to measure by.
Company Alpha has a more prolific sales team. However, they also seem to have a much higher administration cost. Conversely, we can argue that Company Beta is the more efficient total operation.
Now let’s take a look at how to apply this to shippers and carriers.
As a broker, you want to ensure you’re working with reliable shippers. You need your shippers to pay on time. Furthermore, you need the shipments they provide you to be accurate. For your sake, you want to ensure the type of product, amount of product, and availability of product is what was promised. Here, I’m going to dive into just a few of the ways you can use accounting to measure shipper performance.
Outbound Freight Cost Percentages
This is a simple way to measure the cost for the outbound freight that shippers are moving. You’d look at this predominantly in terms of percentage. By dividing the cost of outbound freight by net sales, you’ll find your percentage cost. This number is useful for indicating whether it’s worth the cost to find a carrier to move the freight.
While many claims fall on carriers, shippers can still have claim issues. Problems with packaging or a shortage of expected goods can lead to claims. Often, as a broker, you end up taking the loss for this to compensate a carrier and maintain a relationship. Through accounting programs, you can measure how often this happens with a given shipper. Then you can compare to that to the revenue gained by working with that shipper. Therefore, you should be able to make a more educated decision about whether to continue such a relationship.
Similar to claim costs, the accuracy of freight billing is imperative to a shipper being a valuable ally for you. Shippers may make errors in pricing, weight, number of units being shipped, and so on. Take the number of accurate freight bills you have, and divide them by the number of inaccurate freight bills. This provides you another strong measurement for the value of your relationship with a shipper.
Next let’s examine how accounting can measure carrier performance.
As a broker, quality carriers are at least as important to your success as shippers. You rely on carriers to complete the contracts you’ve agreed on with shippers. Not only that, but you also count on them to do so free of delays and damages. Let’s break down just a few of the ways you can measure their success using accounting.
Perhaps the most important of all carrier metrics is transit time. How long does it take for a shipment to depart the pickup location and arrive at the destination? Depending on the route and commodity, you may measure this either in hours or in days. Keeping an account of the average turnaround times can help you measure carriers against one another. Using this information will help you decide which carriers you trust to complete your freight contracts with shippers.
Carriers Used per Shipment
Depending on the amount of cargo you’ve agreed to parcel out for your shipper, you may need multiple carriers to complete one total shipment. By calculating the number of carriers you need per shipment, you can better understand your leverage over volume. This also helps indicate an overall control of your transportation division.
As with transit time, a carrier’s ability to pick up a shipment on time is vital. This is truly the first line of action toward impressing a shipper. And you can measure it through accounting as well. Take the number of on-time pickups a carrier has made, and divide it by the total number of shipments over a set period of time. Now you have even more data to detect which carriers are most consistently trustworthy.
Making Accounting Measurement Work for You
We’ve discussed what accounting measurement is and looked at examples of how it works. We also examined how it applies to shippers and carriers.
Moving forward, you now have a much better idea of how to examine multiple types of data. Your key to becoming and sustaining a profitable business is to use all of the tools at your disposal. Accounting takes many forms. Hiring smart people and finding useful software programs will help your company succeed.
Finally, it’s important to make full use of technology. There’s a constantly growing set of options intended to make your business life easier. Streamlined paperless workflows and smart use of software will go a long way.
With patience and attention to detail, accounting will help you measure the success of your partners. In turn, you’ll succeed more yourself.
This post was written by Matthew Zandstra. Matt has been working in transportation and logistics dispatch for the past six years, both as a broker and direct to drivers. He’s familiar with various facets of relationships, technical systems, pricing mechanics, and commodities.