The dilemma of rising fuel and transportation costs

For years companies in the transportation industry have dealt with the dilemma of how to maintain profit margins in an economic time where rising fuel and transportation costs are unpredictable. Two common strategies employed by transportation companies are fuel surcharges and hedging of future fuel purchases. Each of these strategies has its own issues and complexities. A fuel surcharge is by far the simplest method from both a business and accounting perspective. It is a common industry practice to assess a fuel surcharge; so if you are not charging a surcharge, you are losing money!

Fuel Surcharge

By following a few simple steps, a fuel surcharge should be easy to assess. First, don’t look at this as a profit center; look at it as a reimbursement of costs. Make sure the surcharge is timely communicated to the shipper and agreed to in advance. It is very important to accurately calculate the surcharge. The calculation is simple and accepted throughout the industry. Make sure you properly bill the surcharge and make sure the shipper is paying it! Don’t fall for the excuse that “our system will not allow us to process a surcharge, it’s too complicated.” That simply is not the case. If you are working with a broker, make sure the broker is assessing a fuel surcharge. If not, find a new broker. Additionally, if the broker is assessing the proper fuel surcharge, make sure that the broker is passing through to you the entire amount. The broker is not entitled to this fuel surcharge nor should it be charging a commission on this surcharge.

Fuel Hedging

The first thing you should consider when looking to hedge fuel costs is to develop an official hedging policy that addresses your risk tolerance, reasons for hedging, approved hedging strategies, approved counterparties, etc. In terms of specifics, you also need to look at periods of time and understand the other macroeconomic factors that could affect your transactions. Typical options could include futures, swaps, call options and possibly collars. Futures and options, including collars, are available on heating oil, a default product sometimes used to hedge diesel fuel, while swaps, options, and collars on both heating oil and diesel are available in the OTC market. In addition, all of these options subject you to more complex accounting and tax rules, which are everchanging.

A fuel surcharge is simple, and is an accepted industry practice. It is simply a reimbursement of costs and something that is a must do, while fuel hedging is more complex from both an implementation and accounting perspective, and as such, fewer companies tend to hedge. Don’t sell your business short, consider fuel hedging. There are many reputable professionals out there, including Schneider Downs, who can assist you through this process and make a complex series of transactions into a “simple and effective” business strategy.

Schneider Downs provides accounting tax, technology, and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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