Learn the best practices to avoid debt and keep a healthy cash flow.
It’s important to create a separate bank account that will be used to manage the income and expenses of an owner-operator business. All your trucking income should be deposited into this operating account. In addition, trucking expenses should be paid for out of this account.
In the event of an Internal Revenue Service audit, having personal finances mingled with your business could cost you thousands of dollars. In addition, it will be impossible for you and your accountant to accurately analyze your business if your personal finances are mixed in with your business.
Every month you should write a “distribution check” out of your operating account to your personal checking account to cover your personal living expenses. The target amount can be determined by looking at your monthly personal and family cash requirements shown in your personal budget.
The best owner-operators have at least $5,000 in reserve before they ever go into business. That amount should be maintained and, if possible, increased, especially with a truck that ages beyond three years. The purpose of the reserve account is to set aside money for large or unforeseen items that could put a substantial drain on your operating cash – major maintenance items, tires, quarterly estimated taxes and insurance deductibles, for example. This money can also be used for a down payment on your next truck purchase or improvements to your existing truck.
The amount to maintain in reserve, as well as the rate at which you pay into it, should be discussed with your business consultant and is based on your budget, your truck’s age and your operation.
CASH FLOW PROBLEMS
A few sure ways to get into financial trouble as an owner-operator:
CASH ADVANCES. Most company drivers get in the habit of taking a weekly cash advance for their expenses on the road. With no cash management tools in place, this often means that come payday, their paycheck is drastically reduced. Many drivers carry this habit forward as owner-operators and, unfortunately, waste the cash on unnecessary things that aren’t in their budget. In addition, transaction fees can add as much as 10 percent to the advance.
Owner-operators who manage their cash this way are never satisfied with their settlement and usually can’t figure out where their money is going. The best owner-operators use their business operating account to manage cash flow instead of taking cash advances.
CREDIT CARDS. It is useful to have a business credit card. However, many owner-operators spend more money than they should simply because a credit card makes it possible. If a credit card balance is not paid off at the end of each month, the interest charges typically exceed 18 percent. At such rates, interest charges quickly compound on unpaid balances, creating a financial trap that’s difficult to get out of.
You’ll get the best rate on credit cards, as well as other forms of lending, by keeping a high credit rating. Federal law now requires each of the three major credit reporting companies to send you a free copy of your credit report, on request, once a year. Visit www.annualcreditreport.com.
OVERDRAFTS. There’s nothing like coming off the road to find one – or more – bounced check notices in the mailbox. Many banks use a tiered structure for overdraft fees, meaning that fees go up as more checks bounce. Add a merchant’s penalty for a bounced check, and the total cost for one overdraft can exceed $50. Some tips to avoid this:
Monitor your account. Record every check as soon as it’s written. Don’t forget debit card purchases. Develop a system for logging automatic monthly drafts, such as for utilities, whether it’s a note on a calendar or a future entry in your checkbook.
Use overdraft protection. Most banks offer this service, which automatically draws from your savings or credit card account to cover a bad check for a nominal fee. If savings is your backup, you obviously need a good stash to make it work. Linking to a credit card is a less favorable option, but paid off quickly it’s still a lot less costly than bouncing a check.
Get online account access. Even if you don’t pack a computer on the road, once you’re signed up at your bank or credit union for online access, you can check your balance and cleared checks anywhere you have Web access to guard against your own or your spouse’s failure to record a check. n
Credit cards that pay back
Many cards offer benefits through rewards programs. As long as you pay off balances promptly and are not charged an unreasonable annual fee, the value of the rewards can be substantial.
For instance, a card might offer money back or credits toward merchandise or travel, based on a percentage of all charges. A fuel card might offer money-back rebates on fuel purchased.
Visit Bankrate.com to see comparisons of credit card cash-back terms, rates and other features.
This is excerpted from the 2010-2011 Partners in Business manual, produced by Overdrive and owner-operator financial services provider ATBS. To order a manual, call (800) 633-5953, Ext. 1301. Visit www.PIBlive.com for more excerpts and seminar information. The program is brought to you by Freightliner Trucks and Schneider National.