Asset Utilization and Fixed Costs in Transportation

Asset Utilization and Fixed Costs in Transportation

*This post is from CMB partner Essex Lease. Visit them for flexible lending solutions.

The transportation industry covers many areas, including trucking, the movement of goods, logistics, warehousing, infrastructure development, and public transportation. As such a big industry, operational efficiency is key to solid market performance and maintaining a competitive advantage.

Efficiency reduces costs, improves the reliability of services, and enhances the overall performance of businesses working in the transportation sector. All of these will ensure that your business stays competitive in a highly saturated market and meets the customers’ expectations and demands.

But how do asset utilization and fixed costs come into operational efficiency in transportation?

In this article, we’re going to answer this question and many more regarding how you can be the most efficient business in the transportation sector. Learn more below.

Understanding Asset Utilization in Transportation

Asset utilization refers to how effectively a company is using its assets to generate revenue. These assets may be equipment, facilities, or resources, and the measure is of how efficiently these assets are being turned into productive outputs and services. Higher asset utilization indicates better efficiency in using assets to generate income.

For transportation businesses, asset utilization can ensure that your vehicles and other resources are being used efficiently, reducing costs and contributing to good overall operational efficiency.

To calculate asset utilization, you should use the following formula.

Asset utilization = Revenue/Average total assets

Where the revenue is the total sales generated by the company and the average total assets is the average value of the company’s assets over a specified period.

Your rate of asset utilization can impact your finances in a few ways.

  • ROI: Efficient use of your assets enhances your return on investment (ROI) as it maximizes the revenue generated from your investment.

  • Profitability: When you’re using your assets as efficiently as possible, you’ll generate increased revenue without proportionally increasing your costs. This means more profitability!

  • Investor confidence: Investors will have more confidence in your operation if they can see you using your assets efficiently. It is a key indicator that, as a company, you’re managing your resources effectively. Increased confidence from your investors can lead to more investment and a boost in shareholder value.

  • Liquidity and cash flow: Assets that are used efficiently increase the cash inflow into your business, which means that you can meet operational costs more easily and have more room for growth.

  • Strategic moves: One of the best things about understanding asset utilization is that it means you can optimize efficiency, deal with underutilized avenues and ensure that all resources are allocated efficiently. This will lead to more stable long-term planning and better financial performance.

Fixed Costs for Transportation Businesses

Fixed costs, as the name suggests, are expenses that do not change for your business, even as production levels increase or sales fluctuate. The costs remain constant and can include real estate rental payments, salaries for permanent employees, insurance premiums, and lease payments.

More specifically for transportation businesses, fixed costs could constitute any of the following.

  • Vehicle depreciation

  • Vehicle and business insurance premiums

  • Licenses and permits

  • Vehicle maintenance costs

  • Rental costs for business facilities, like transportation parks, offices, and more

  • Lease payments

  • Property taxes, such as for terminals, parking facilities, and other spaces you own

  • Tech and software subscriptions

Fixed costs should not be confused with variable costs, which fluctuate in direct proportion to the level of output or sales. This will include direct labour, fuel costs, and raw materials.

As a business, managing your fixed costs is essential to maintaining financial stability, improving profitability, and ensuring that your business has long-term viability and continued success.

How Asset Utilization Affects Fixed Costs

So, how do asset utilization and fixed costs intersect in the transportation industry, and why does it matter for your business?

Asset utilization has an impact on fixed costs for your business in a few ways. These include the following.

  • Reduced Cost Per Unit: More efficient use of your assets means that the fixed costs relating to your asset and broader business are spread across a more significant number of services or products provided. For example, if you process 40 units per day, then your rental payments for your warehouse are spread across the revenue generated from these 40 units, but if you boost asset utilization and start processing 60 units per day, you’ve got more revenue to meet your rental payments.

  • Increase Profit Margins: Due to the reduced cost per unit mentioned in the previous point, better asset utilization will also improve your profit margins, which not only gives you room to grow but can increase investor confidence and business value.

  • Better ROA: ROA refers to the return on assets and is a financial metric that measures how well your assets are used to generate earnings. Better ROA is important for more efficient management, investor confidence, and long-term sustainability as a business.

Strategies for Optimizing Asset Utilization to Control Fixed Costs

So, how do you optimize asset utilization in the transportation sector? What methods can ensure that your resources are being used as efficiently as possible?

Route Optimization

Software nowadays can help you to optimize your delivery routes to reduce fuel consumption, travel time, and wear and tear on vehicles, all of which will have a positive impact on asset utilization rates.

Implementing Fleet Management Systems

These systems are designed to monitor and track vehicles at all times. With this tracking of data, you can begin to make decisions based on the data that you collate, which can ensure better maintenance planning and fuel efficiency.

Dynamic Scheduling

This kind of scheduling considers factors like traffic, weather, and demand fluctuations. Using dynamic scheduling systems allows for flexibility in the schedule and adjustments that reduce travel time, fuel consumption, and unnecessary journeys.

Proactive Maintenance Scheduling

Proactively scheduling maintenance on vehicles means limiting downtime and ensuring that your vehicles are well-maintained and reliable.

Load Consolidation

Combining shipments is an effective way to maximize the capacity of each vehicle, reduce the number of trips your vehicles make, and lower the overall cost of fuel.

Challenges of Optimizing Asset Utilization and Managing Fixed Costs in the Transportation Sector

Managing fixed costs is great when your assets are being used efficiently, and you’re making good profits, but there are challenges associated with optimized asset utilization in the transportation sector that you may face.

Fluctuating Demand

Changes in consumer demands can make it challenging to use your vehicles and equipment at their optimum efficiency constantly. With the peaks and troughs of demand, you may go through periods of under- and over-utilization of your assets.

Fuel Prices

Unfortunately, fuel prices are not exactly stable and haven’t been for some time. The variable cost of fuel can impact the operating costs of your assets. This can have an impact on the cost efficiency of your asset utilization strategies.

Regulatory Compliance

Like all industries, the transportation industry is not without standards and legal compliance. Everything from hours-of-service for drivers to emissions standards can impact your ability to optimize the utilization of your assets.

Depreciation of Assets

Vehicles depreciate over time, so trying to find the balance between a modern and efficient fleet with the impacts of vehicle depreciation can be difficult when trying to improve utilization.

Disruptions in the Global Supply Chain

Everything from pandemics to the outbreak of war to natural disasters can have an impact on supply chains, which, in turn, impacts your ability to optimize your asset usage. These disruptions can then have an impact on how you meet your fixed costs.

Implementation Costs of Tech

While technology and software that offer dynamic scheduling or optimized routes can have a positive impact on your asset use, the implementation of such tech can be pricey. You not only need to pay for the software and its setup, but you will also need to train employees how to use it for best results. This variable cost can impact your ability to meet fixed costs.

Optimizing Asset Utilization With Essex Lease

At Essex Lease, we’re committed to helping you grow. One of the easiest ways to do this is to make greater profits and then put this money back into your business to expand services, improve product ranges, or open new locations.

Improving your asset usage and operating efficiency can help you improve your chances at growth and expansion, but doing so may require you to spend money first. If you‘ve been looking into optimization methods and have found you need a helping hand when it comes to financing these strategies, then Essex Lease is here for you.

As your best choice for an alternative lender, we have a few different options for business financing that you can take advantage of, including asset-based lending and equipment lines of credit.

Unlike our more traditional counterparts, we make the approvals process easier. While we do need to see your financial history, we don’t only consider the figures on your credit report when deciding whether to proceed with your application. While more traditional financial institutions, like banks and credit unions, may reject your application because of blips in your credit history, we take your character into account, too.

If you want a flexible way to finance your optimization strategies with a lender that truly understands your business, then contact Essex Lease today.

Final Thoughts

Proper asset utilization is key to optimizing your operations and getting the most out of your assets. It can improve profitability, ROA, and the overall efficiency of your business. As such, improving asset usage can have a profound impact on the success of your business.

There are many strategies you can use to optimize your asset usage and improve overall efficiency, and if you need financial support while doing so, Essex Lease is here for you.