Accounting and budgeting is not the forte of the transport manager (TM): businesses employ them for their skills in leading supervisors and drivers, co-ordinating training, managing the fleet and providing a reliable delivery service.
However, there’s no escaping the fact that TMs need a certain level of financial astuteness to perform their duties effectively. They are big money spenders in their businesses, signing off expenses and managing large budgets.
Following a simple three-step process can make the tortuous task of budgeting easier.
The three steps are:
* Establishing cost assumptions
* Determining budget line costs
* Managing and controlling the budget
1 Establishing cost assumptions
Inflationary indices for the upcoming year are widely and, often, freely available. These are the expected rises in costs. If accounts can’t provide them, you can find them online from the Office for National Statistics or industry bodies such as the FTA, RHA, IoTA and CILT.
Next, forecast volume. This involves working closely with the sales team to gain an understanding of promotional initiatives and seasonal patterns all of which will impact transport activity.
It’s a CPC (Certificate of Professional Competence) requirement that transport managers keep updated on industry issues. Nowhere is this more important than in budgeting. It’s not great if you get caught out by transport issues you did not budget for.
Brexit, ECMT permits, specialised heavy goods vehicles coming into scope for plating and annual testing, driver shortage, Earned Recognition, smart tachographs, and ultra-low emission clean air zones are some of the issues currently affecting the industry.
Any assumptions made should be documented so they can be revisited when analysing actual cost performance against budget.
2 Determining budget line costs
Your budget should contain enough line items to give good cost visibility but not so many that it becomes arduous. Lines include vehicle depreciation, fleet leasing and management, agency hours, overtime, training and development expense, subscriptions, fuel, vehicle maintenance, fleet insurance, resale value adjustment, software fees, tolls and parking.
Resist the temptation to use the ‘x per cent rule’, simply adding a percentage to the previous year’s line costs. The recommended approach – zero-based budgeting – involves building costs up for each line from zero justifying every pound to be spent.
During this procedure, important tactical decisions are made for the different budget lines. For example, vehicle maintenance: in-house workshop or external maintenance contractor. If you opt to use an external maintenance provider, do you take out a repair and maintenance contract which covers scheduled safety inspections and servicing only or do you also include repairs? Do you take out an R&M contract with the manufacturer, often the most convenient choice, or do you seek better value from an independent provider?
What is your approach to planning daily routes; fixed or dynamic? The system used can affect operational costs significantly. Are you running cost-effective routes that minimise fuel expenses and driver hours? All the line costs can then be summed up to establish the total budget required to run your department.
3 Managing and controlling the budget
The budget must be broken down into weeks or months so timely action can be taken if actual costs start to go wayward. Most of today’s accounting systems have the capability to produce daily, even live, reports at no extra expense or effort.
Fixed costs such as utilities, insurance and software fees, can simply be divided by the number of reporting periods, that is, 52 for weekly targets and 12 for monthly. Variable costs such as spot hire rentals, agency hours and fuel will have to follow volume patterns.
Next, keep a close watch over actual cost performance against the budget noting cost lines where you are under- or over-budget. This variance needs to be investigated so the causes can be addressed.
Only a thorough root cause analysis will ensure the true cause of each budget variance is identified. If this is not done, resources will be wasted treating symptoms rather than underlying problems.
For example, a quick investigation into excessive spend on driver agency hours might suggest high agency rates and lead to seeking a cheaper agency. This may work in the short term, but market pressure may eventually force the new supplier to increase rates to be able to pay wages that attract a good calibre of drivers, then you’re back where you started.
Ask ‘why’ repeatedly to get to the core issue. Writing down all the causes, known as variance documentation, is important as it provides reference for future budgets.
Terrence Jumbe runs a logistics consultancy helping restricted licence operators with transport planning and compliance solutions. He is an authorised audit
provider for the DVSA Earned Recognition Scheme, with 22 years’ experience working in courier, industrial B2B, FMCG and large retail chain environments.
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