Establishing Cost Centers and Allocations for Greater Financial Clarity in Trucking

KSM Transport Advisors’ (KSMTA) newest article series explores key aspects of FreightMarks^™, our benchmarking service designed to help carriers gain clearer financial insights and improve decision-making. Each article will highlight a category from our Data Standardization Guide, a resource that provides carriers with a structured approach for revenue and expense categorization for internal management and industry benchmarking. This series offers practical guidance to enhance performance and drive success.

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In the trucking industry, clear and transparent financial data isn’t optional – it’s essential for survival, especially during market fluctuations. Properly structured cost centers within your general ledger (GL) help provide a granular view of operational performance, supporting effective management decisions and precise benchmarking.

Why Cost Centers Matter

Clearly defining cost centers within your general ledger (GL) enables precise visibility into your operation’s financial health. KSMTA recommends segmenting operational results by specific capacity types:

• Company Fleet
  • Driver Wages: Base pay (per mile, percentage of revenue, hourly), accessorial compensation, per diem (23%-42% of revenue). This is highly dependent on the specific geographic region.
  • Benefits, Incentives, and Payroll Taxes: Benefits (insurance, retirement), payroll taxes, bonuses (2%-17% of revenue)
  • Fuel Expenses: Diesel (tractor and reefer), DEF, fuel taxes (15%-25% of revenue)
  • Tractor Maintenance: Labor and parts, tires, warranty recovery (2.5%-10% of revenue)
  • Variable Expenses: Scales, driver lodging, transaction fees (minimal percentage of revenue)
• Owner Operators
  • Purchased Transportation: Mileage, percentage-based payments (63%-85% of revenue)
  • Benefits and Incentives: Bonuses, subsidized insurance (0.5%-2% of revenue)
  • Fuel Expenses: These are typically covered by the owner operator (minimal if applicable)
  • Maintenance Expenses: These are typically the owner-operator’s responsibility (minimal if applicable)
• Lease Purchase Operators
  • Purchased Transportation: Mileage or percentage payments (51%-70% of revenue)
  • Benefits and Incentives: Safety, productivity bonuses (0.5%-2% of revenue)
  • Lease/Rent: Lease payments, related equipment costs (included in purchased transportation)
• Brokerage
  • Purchased Transportation: Payments to third-party carriers (these are variable and typically the largest expense)
  • Non-driver Wages and Benefits: Salaries, payroll taxes, benefits (4%-10% of revenue)
  • Overhead Expenses: Office supplies, technology, marketing (4%-10% of revenue)
• Total Asset Operations
  • Trailer Maintenance Expenses: Parts, tires, outside vendors (1%-3.5% of revenue)
  • Non-driver Wages and Benefits: Administrative, operational, shop staff (4%-10% of revenue)
  • Fixed Overhead Expenses: Office, utilities, professional services (4%-10% of revenue)
  • Recruiting, Screening, and Retention Expenses: Driver recruitment and retention (minimal percentage of revenue)

Rationale for Total Asset Operations

The total asset operations category consolidates general operating expenses that apply across multiple operational segments, rather than to one specific capacity type. By categorizing these broader expenses separately, carriers can effectively allocate overhead and indirect costs across their entire operation, rather than inaccurately assigning them to specific segments.

This method ensures a cleaner, more precise analysis of operational performance for each distinct cost center, facilitating more accurate benchmarking and clearer strategic decision-making.

Benchmarking Through Effective GL Mapping

Accurate benchmarking begins with precise mapping to the KSMTA Standard Chart of Accounts (COA). Proper mapping ensures your financial data is comparable to industry benchmarks, driving clarity and actionable insights.

Preferred Mapping Method: Direct Allocation

Direct allocation is the most precise method, explicitly mapping revenues and expenses at the GL account level directly to their associated cost centers. This method delivers unmatched accuracy and transparency, forming the foundation for reliable benchmarking and decision-making.

Secondary Method: Ratio Allocation

Ratio allocation is recommended when direct allocation isn’t achievable, as it directly links expenses and revenues to operational metrics such as dispatched miles. For instance, if your GL combines company fleet and owner-operator linehaul revenue, allocating based on dispatched miles proportionally distributes revenue, significantly improving benchmarking accuracy.

Alternative Method: Percentage Allocation

When neither direct nor ratio allocation is practical, percentage-based allocations offer a practical alternative. Workers compensation, for example, can be effectively managed by applying set percentages – such as 90% for drivers and 10% for non-drivers and maintenance personnel – ensuring consistent and benchmarkable financial data.

Implementing Allocations for Decision-Making

Precision in your allocation strategy significantly impacts management decisions. Clearly allocated expenses such as driver wages, payroll taxes, and benefits provide accurate operational cost insights, empowering strategic benchmarking and effective expense management.

Robust allocation methodologies facilitate detailed comparative benchmarking, crucial for strategic agility in challenging economic conditions. Companies with precisely allocated GL data can respond swiftly and strategically to market fluctuations, maintaining profitability and competitive edge.

Enhancing Benchmarking Through FreightMarks

FreightMarks, KSMTA’s specialized trucking benchmarking service, relies heavily on accurately segmented and precisely allocated GL data. FreightMarks provides transparent comparative analyses of financial and operational performance against industry peers. Utilizing standardized metrics, FreightMarks identifies actionable improvement areas, enabling carriers to proactively enhance their operational efficiency and profitability.

A carefully structured GL with clearly defined cost centers and strategic allocations isn’t merely good accounting – it’s essential strategic planning. It positions your organization to proactively navigate and thrive amidst market volatility.

Interested in harnessing the power of precise financial insights? Discover how FreightMarks can elevate your benchmarking and profitability analysis. To learn more or start your FreightMath^™ journey, please contact a KSMTA advisor via the form below.