Capital Reserve Framework

This topic comes up often and parts of it are fleshed out but not usually with enough of the contributing factors in one go. As part of a side project I want to share my assumptions for critique so I put together this rough draft.

Identifying the startup reserves needed to plot a high probability of success.

BOTTOM LINE UP FRONT

• 100k capital reserve for limited experience new entity.
• One year timeframe.
• Equation is 100,000 miles a year × (.5 salary + .3 equipment + .15 insurance + .05 permits etc) = 100k

IMPORTANT NOTE: THIS IS NOT REPLACEMENT LEVEL COSTS FOR THE EXPENSES RATHER IT IS A SUBSIDY SO THE ASSUMED AMOUNTS ARE A MAJORITY FRACTION OF THE HIGHER REALIZED COSTS AS OUTLINED IN THE 5 YEAR OLD PINNED COMMENT FOR THIS FORUM BY DUNE-T

EXPLANATION

These are the funds after all major startup costs have been expended including equipment, permits, accessorial, etc.

If you're at this stage of the process you should already have your personal finances separated from your professional excursion. However, there is a downstream effect as now you are responsible for the salary of your lone employee so that amount will impact the thickness of your specific cushion.

There have been 12 trucking recessions in the last 50 years so that puts the average cycle at about 4 years. A cycle includes an uptrend, downtrend, top, and bottom. Based on that a safety net should cover one year of a bottoming process. The exact depth and duration will vary but as a rule of thumb a one year reserve combined with reduced but continual revenue is a good starting point until you accumulate further experience.

The reserve should cover fixed, but not variable, expenses and salary. As a new entrant single owner operator it's important to recognize that your personal level of determination is a luxury and shouldn't be used as a major input for your calculation.

The applicable framework should be structured around the question: Out of 100 average truckers going through this process how many will fail with this level of emergency reserves? So while there are outliers who will strive through on a shoe string budget or participants who enter in an ideal part of the cycle we know most won't.

Ideally we want a failure rate that only includes Act of God level events
so that we have a system that can scale and minimize the chance of enduring a slow bleed death. Unfortunately we don't have nuanced models with extensive datasets like we were underwriting insurance so we will go with a 5% failure rate while in reality it should probably be less than half of that.

This will give us the quick glance gut reaction answer of looking at the number we continually update and asking: Will more than one out of twenty guys fall on their face with this fund?

The napkin math assumptions for our inputs are 100,000 miles a year, 50 cent per mile salary, 15 cent per mile insurance, 30 cent a mile combined mix of equipment and maintenance, and 5 cent per mile permits, office, and random annoying expenses.

That's a 100,000 dollar foundation that will adjust downward as more experience is gained in the front of the learning curve then fluctuate appropriately with industry and company specific conditions furthermore.

There are several tangents related to aspects of this broader topic such as cost of equipment and maintenance mix, forms of capital to act as a buffer, and order of operations when scaling.

 

Thanks for adding value.

Recession debate seems mostly semantic and I also agree with the market forces perspective.

4 months of capital is a useful metric, is that in general or new entrant specific?

Interesting that you don't include wages as part of the cushion. Did I understand that correctly and can you elaborate?

 

Yes that's the assumption.

If they have enough control over their personal finances to save for buying a truck, insurance, permits, etc as well as having a sufficient cushion to act as a safety net then they have the basic business acumen to get started.