It can be empowering to understand what the effect of different decisions may be on your business's finances, as they can be profound.
From the business of transportation, an example stands out as the "poster child" for what the value of utilization can be. Consider the below example.
Example of the Impact of Utilization on Profits:
Scenario #1:
1. You have one truck performing pick-up & delivery services.
2. Your driver begins work at 7AM each morning, and works until 3PM. You pay the driver for 8 hours at a rate of $30 per hour.
3. For the sake of using round numbers, let’s say your customer pays you an average of $100 per hour for the 8 hours your truck is on the road. So, your revenue from the vehicle each day is $800 (8hrs * $100).
4. Let’s also say that your all-in costs of running the truck (including the driver pay) is $65 per hour. That means your net profit from running the truck is $35 per hour, or $280 per day. Let’s assume the truck is on the road 5 days per week, 52 weeks per year. That means your net profit from the truck per year is $72,800.
Scenario #2:
1. You have one truck performing pick-up & delivery services.
2. You have two drivers that double-utilize the truck. One driver begins work at 7AM each morning, and works until 3PM. The other driver begins at 3PM and works until 11PM (assume the second driver is picking-up and delivering from and to establishments that are open late). You pay both drivers for 8 hours at a rate of $30 per hour (each).
3. Your customers pay you an average of $100 per hour for the 16 hours your truck is on the road. So, your revenue from the vehicle each day is $1,600 (16hrs * $100).
4. Your all-in costs of running the truck (including the driver pay) are NOT the same as in Scenario #1.
a. In Scenario #2, the overhead costs (fixed costs) of running the truck don’t increase for each additional hour the truck is on the road. For example, you don’t need to buy or lease another truck. You don’t need to purchase more insurance. You don’t need to pay your executive assistant more, you don’t need increase the rent for your office, etc.
b. Only the variable costs to run the truck increase (e.g., fuel, maintenance, and driver pay). So, your all-in costs will be lower in this scenario than in Scenario #1. Let’s say that in this scenario your all-in costs of running the truck average out to be $60 per hour: $35 per hour for the driver, plus variable costs for each hour the truck is on the road, plus overhead costs (spread out over 16 hours in this scenario, as compared to 8 hours in Scenario #1). In this scenario, your net profit from running the truck is $40 per hour. You’re running it 16 hours per day, so your net profit per day is $640 ($40 * 16). That’s $166,400 per year
These two scenarios are a simple example. The actual situation would likely involve some additional considerations, such as:
· The truck would have to be replaced more frequently due to the higher utilization (which would result in higher capital costs over time – but not enough to offset the total benefits).
· Fluctuations in the fuel costs due to different traffic patterns during the second shift (though this could have a net positive impact on the profit per hour in Scenario #2).
· Driver availability – finding drivers willing to work the second shift might require higher pay.
Part of what fractional CFOs can do is help you project future profits in different scenarios, considering factors like utilization. If you'd like to find out how a fractional CFO can help you analyze the impact of different decisions on your business's finances, contact us to schedule a free initial consultation. We'd love to chat with you.
