When searching for ways to cut costs and improve efficiency, small-business owners can be very creative. Although factors outside their control have caused a dramatic rise in oil prices, some small-business owners are discovering ways to get the most out of their fuel usage. See the following article from The Street for more on this.
Small-business owners with fuel as a major expense are being forced these days to get more efficient. And most say that’s not a bad thing.
Surging gas prices have topped the news for weeks as gas prices have crept toward $4 a gallon, with some bearish experts speculating we could see $5 per gallon by the summer.
The unrest in the Middle East, causing crude oil to top $100 a barrel, as well as the United States’ reluctance to so far tap its strategic reserves, has been hitting consumers and large and small businesses in the gut.
But several small businesses say that as much as soaring gas prices cut into the bottom line, they’re doing everything they can not to raise prices — yet.
Those initiatives include routing optimization, using more fuel efficient cars and trucks, considering other fuel alternatives and, in at least one case, using hedges to offset rising costs.
"It definitely makes us look at every line item on the balance sheet and where we can trim," says Melissa Adelaine-Supernault, a partner and project coordinator at Michigan’s Adelaine Construction. "It’s constantly a balancing act. [We’re] being as efficient as we can, but not jeopardizing our offerings to our customers."
TheStreet spoke with five small companies for which fuel is a major expense and asked how they’re handling the problem.
Adelaine Construction; Harbor Springs, Mich.
Soaring gas prices have made Adelaine Construction, a residential homebuilder and home renovation company, rethink the jobs it agrees to and how workers get there.
Fuel prices hit the company’s bottom line quickly, since trucks are used to deliver materials and workers to the sites.
"Our trucks are constantly moving. When fuel prices change it hits us in the pocketbook right away," Adelaine-Supernault says. "We can’t go back to customers [and say] ‘Oh, by the way, fuel went up. I’d like to charge you more.’"
Companies such as Adelaine Construction face the challenge of trying to be fuel efficient, but at the same time having to tow and carry large cargo and materials.
"As a builder, we have to have trucks," she says. "It’s not like we can buy a [Toyota (TM)] Prius."
But escalating gas prices makes it difficult to project overhead and expenses. Last year, the company spent about $15,000 in annual gas expenses. This year, if prices remain relatively unchanged, projected gas expenses could total $18,000, an increase of 20%.
Last year, the company got rid of their largest truck, which was used mainly for transporting materials, leaving three company vehicles. It has started to rely more heavily on local lumber yards to deliver the materials to work sites.
"It takes more coordination on our side. I have to plan ahead" to order materials, which in the end just makes the company operate more efficiently, she says.
Another way the company is cutting is by limiting the radius for projects. Adelaine-Supernault says she likes to keep the projects within a one-hour drive of the office. That being said, as the company grows, workers must drive farther to get to projects.
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"They’re essentially making less money and our company is less profitable because it takes longer to get to work," she says.
North Raleigh Florist; Raleigh, N.C.
Janice Cutler, president of North Raleigh Florist, is doing her best not to raise delivery prices amid rising gas expenses.
But it sure is difficult. Rising gas prices "definitely affects us directly because we are in the delivery business," Cutler says. "We deliver flowers six days a week."
"People come to us because of the convenience of having something delivered, and if we turn people off because of gas prices then we don’t have a business," she says.
North Raleigh Florist has one company van that does the majority of delivery work. When business gets heavier, such as around the holidays, Cutler hires contracted drivers.
In 2008, the last time gas prices rose exponentially, the company put together set delivery areas to save on gas, Cutler says. (It won’t go farther than 40 miles without charging extra.) The florist also considered raising delivery prices if prices stayed high.
Thankfully they didn’t.
"We did think about it and started to come up with a plan, but it didn’t last long enough," she says.
This time, if the florist must raise prices, Cutler says it will be less than $1 per delivery.
"Our delivery prices are reasonable and competitive," she says. "We don’t go outside our delivery area unless we charge extra for it. We are starting to think about the threshold for how long we can wait before we raise prices."
Cutler says the company is also starting to get permission from customers to call delivery locations to make sure someone is present to get the flowers. "We don’t want to charge somebody another delivery fee just to go back," she says.
But another unintended consequence of rising gas prices is that Cutler’s wholesalers are, in certain cases, raising prices. In the end, she’ll have no choice but to pass it onto the customer.
The Provider Enterprises; Brentwood, N.H.
Transportation contractor The Provider Enterprises works with schools to bus special-needs children.
Scholes’ mother founded the company in the early 1980s to take his sister to school. The company now has a fleet of 200 vehicles that transport more than 1,600 kids per day, running roughly 130,000 miles per week — roughly 5 million miles annually.
"Fuel is our biggest expense next to labor," Scholes says, estimating fuel costs at between 10% and 15% of his budget.
Most of the fleet are small school buses, more commonly known as short buses. Scholes is adding Kia Sedonas, which run roughly 23 miles to the gallon versus 11 miles for the buses, he says.
Like North Raleigh Florist, the company is routing drivers more efficiently. Scholes has also installed onboard GPS systems that give frequent automated reports that track bus service and show when a bus may be sitting idle for too long.
"We’re paying a lot more attention to it," Scholes says.
Still Scholes projects that his gas expenses will rise more than 20% this year as compared with last year.
While Scholes expects gas prices to go down, in the meantime he has begun hedging fuel costs by investing in the futures market and is considering other ways to limit his reliance on fuel. One option is to use more fuel-efficient cars for longer trips or use compressed natural gas vehicles.
Unfortunately, because the company is under contract with school districts, "if fuel goes up it just means our bottom line gets smaller," Scholes says.
AdvantaClean Systems; Huntersville, N.C.
Before even gas prices took a bite out of the bottom line, AdvantaClean Systems CEO and founder Jeff Dudan was looking to cut costs to avoid raising prices for customers.
The emergency water and mold remediation company has 70 franchisees in 19 states.
Jobs are usually so big they require more than one van, Dudan says, but franchisees are starting to attach trailers instead, and many use the Mercedes-Benz Sprinter to shuttle equipment between locations. It looks like a large cargo van, but because it is a four-cylinder vehicle, saves a lot on gas.
Dudan also sees franchisees becoming more compliant with the company’s best practices. While AdvantaClean uses a central call system to route jobs to the franchisee closest to a job, in the past some would do a job even if it wasn’t in their home territory. Now, rather than drive what could be miles out of their territory, a franchisee is much more likely to hand over a job.
"What we see is people a little less likely to drive out and do very small jobs," Dudan says.
The company is also using new equipment that is faster and lighter and should lead to fewer return trips to a job site.
There are also little things the company is doing to make sure a job is worth the price in fuel, such as confirming appointments; making sure the job is large enough to be considered profitable for a franchisee; and "route optimization" with Google (GOOG) maps.
"Other than that we run a pretty tight ship regardless of what the gas prices are," Dudan says. "None of our people have office staff, or very few, because we handle so much of the back office [centrally], so there is just not a lot of places to get more efficient."
Lake Michigan Mailers; Kalamazoo, Mich.
David Rhoa of Lake Michigan Mailers, a document management and mail distribution company in the U.S., Canada and Great Britain, says that for every penny increase in gas prices, it costs the company about $50 in additional costs per day.
"It goes right to our bottom line," Rhoa says. "We’re really an airport without airplanes."
Like the other business owners, Lake Michigan Mailers spends "a tremendous amount of time optimizing our service route," Rhoa says. "We’re trying to run it as efficiently as possible. … We want our trucks to be as full as we possibly can get them. We try to have as little overlap as possible."
Rhoa says that the company’s fleet, a combination of Ford (F) Econoline Cargo Vans for large distributions and the more fuel-efficient Ford Transit Connects, are closely looked after and serviced frequently.
But like, Scholes at The Provider, Rhoa is intent on finding alternative-fuel vehicles such as electric cars. Unfortunately, it seems Rhoa is one step ahead of the times — either a vehicle is not offered in small quantities or costs too much, Rhoa says.
Rhoa says he is interested in electric vehicles such as the Smith Newton Electric Truck, but the company company seems interested only in marketing to large distributors such as PepsiCo’s (PEP) Frito-Lay.
The other problem is that electric cars do not have enough mileage range to get around Lake Michigan Mailers’ distribution area before needing to be charged, Rhoa says. For the foreseeable future, it looks like traditionally fueled trucks will still be the main distribution vehicles.
"I run a small business and I can’t get the numbers to work," he says.
This article has been republished from The Street. You can also view this article at The Street, a site covering financial news, commentary, analysis, ratings, business and investment content.