Whether you are a licensed freight broker, a freight agent, or employed by a freight brokerage you need to understand margins. Margins are what ultimately pay freight brokers and are often a leading cause for the failure of some brokerages. Below, I’m going to discuss what the margin is and why it’s important to understand.
What are margins?
Simply put, a margin is the difference between your accounts receivable (AR) and accounts payable (AP). It can be represented by a dollar amount as well as a percentage. We can use a simple example to break this down. Let’s say you have a customer paying you $1,000 for a load, and you book a carrier for $850. That means your AR is $1,000 and your AP is $850. Your margin on this load is $150 ($1,000 – $850), which is 15% ($150 / $1,000). It’s that simple to calculate, buy why is it important and what should you aim for?
What should your margins be?
As a freight broker, your margin is the only money that you can use to cover your expenses and earn a paycheck. Once the carrier has been paid, the remaining money must be enough to cover every expense associated with that load otherwise you essentially lost money. It’s more realistic to track your average margin over a certain timeframe such as a week, month, or year since they can change dramatically from load to load. For example, loads with a higher AR usually have a lower margin percentage since the actual load profit is a small fraction of the customer invoice compared to a lesser paying load. A simple example is comparing a short LTL run versus a long-haul FTL shipment.
Some LTL shipments can pay as little as $100 with the broker only profiting $20 as an example, while a long haul FTL shipment might pay $5,000 with a $500 profit built in. The LTL example gives us a 20% margin, while the FTL shipment only yields 10% margin. Obviously, the dollar amount is higher on the FTL shipment, which is why we need to always consider the dollar amount and the margin percentage together. At the end of the day, you get paid in dollars and cents, not percentage points. That being said, higher margin percentage will always lead to higher margin dollar amounts. Your totals and averages for the month will give you a good insight into the health of your book of business
Depending on which sources and data you look at, you can find various reports on the average margins for freight brokers. Data from throughout 2020 has shown us that freight brokers are averaging around 15% overall with each load yielding around $270 in profit. I tend to find most successful brokers average somewhere between 12-18% in margin. Sure, there are some outliers that are above or below that, but this is the bulk of brokers that I’ve worked with.
Why do margins matter?
As mentioned previously, the margin pays you and your expenses so depending on your overhead and expenses, your margin needs can vary. No matter what kind of business you have, you need to have a positive margin to stay afloat. Some newer brokers attempt to move freight at a loss to gain accounts in the beginning. This is a slippery slope since they need to make up for the loss over time to become profitable. No customer wants to have price increases for no realistic reason other than the broker priced them negative on purpose. Even if your margin is positive, it’s not smart to price a customer super low in the beginning just to gain their business. Brokers that try and operate close to 5% margin to be the “cheapest option” often shut their doors because they aren’t making enough money to keep the lights on.
A customer’s payment terms also play a role in margins. Let’s say for example that you pay your carriers in NET 21 (paid 21 days after they invoice you), but your customer is on NET 45 (45 days to pay their invoices). You must cashflow the difference, which requires excess money in the bank or the use of a factoring company. Factoring companies charge a percentage of your revenue, typically around 3%, which takes even more money out of your bottom line. Many brokers will set customers and carriers up both on NET 30 to keep cashflow strain as limited as possible, but that doesn’t stop a customer from slow-paying when they are financially strained, not to mention no-paying if there is a claim or dispute. Healthy margins and customers that pay promptly are two huge factors to the success of a freight broker.
Calculate your cost per load
You might be a savvy salesperson on the phone or cover freight with ease, but that doesn’t mean you understand financials and break-even points like a pro. It’s crucial that you understand the financial aspect enough to determine your cost per load, or breakeven point. For example, if you move 100 loads on average each month and you have $5,000 in expenses before you turn a profit (software, insurance, load boards, etc.) you can calculate the average expense on a per-load basis. $5,000 / 100 loads equates to $50 per load. This gives you a good idea of how much you need to earn on each load before you really turn a profit. Some larger brokerages will require their employees or agents to make a certain amount on each load before they are eligible to collect a commission. This is precisely why.
Prepare for fluctuations
Margins can change through the year and throughout a typically market cycle, and you should expect them to. For this reason, it’s healthy to keep enough retained earnings (cash reserves) to cover the ebb and flow of your margin. Many financial experts recommend having 3-6 months of expenses as your reserves. As capacity tightens in certain lanes, seasons, or due to other factors you will see an increase in the cost to book a truck. That increase usually doesn’t catch up to the customer’s rate right away which leads to brokers having a lower margin during that transition. On the flip side of this is when truck rates decrease. When this happens, brokers often see an increase in the margin before they pass the cheaper rates on to their customers. This natural shift occurs during every normal market cycle.
Look to the future
If you are a W-2 broker, you likely don’t have to think about all of this too much. Your employer probably just tells you what you need to produce, what margin you need to be at, and how much you need to make on each load. They’ve done their homework already. Licensed brokers really need to figure the margin piece out to be successful and profitable enough to continue the life of the business. Freight agents fall somewhere in the middle since they aren’t an employee, and don’t have to run the company’s financial books. Agents simply move a load and earn a percentage of the load profit. All that said, good paying customers and healthy margins are usually requirements for an agent to be offered a home at a top agent-based brokerage with a high commission split.