News
Don’t fly by the seat of your pants
Figuring cost per mile

By John Siebert
OOIDA foundation

 

When airplanes were a new idea, pilots were the cowboys of the air. Barnstormers literally flew in and out the open doors of barns. They truly flew by the seat of their pants. They had a wicker seat, a control stick and a really great view. Over time, however, there were fewer and fewer of them. They were flying into the barns, but not always coming out the other end.

As the next generation of pilots evolved, they started developing tactics to stay aloft and alive so they could fly again tomorrow. The tactics often took the form of cockpit instruments that told them how well the equipment was running: fuel gauges, air speed indicators, oil pressure gauges and engine temperature gauges. With the advent of each new gauge, the pilot’s life expectancy was extended.

Today, instrument-rated pilots make entire trips without looking at much of anything except their instrument panels. Everything they need to know to fly that plane safely to their destination is right there on the gauges and navigational equipment.

The trucking industry has its own history of cowboys and of flying by the seat of your pants. However, as competition has increased, it has become vital that independent drivers have a feel for how their operation is faring at any given point in time. Before, just running might get you by and even make you a little money. Today, if you don’t run smart, you can run yourself right out of business.

One of the easiest ways of taking the pulse of your company is to track and control the cost of doing business. This will require some bookkeeping, but you already have most of the information because you are already tracking the numbers for the IRS. Why not make them work for you at the same time?

Once you know what your costs are, you can start taking steps to control those costs. That has a direct effect on your bottom line. Costs for operating a truck fall under two general categories; fixed and variable costs.

Fixed costs

Fixed costs are expenses you incur just by having your truck parked out in your driveway. You have a daily exposure to them, rolling or not. Some days of the year – such as Christmas, Thanksgiving and your birthday – you may decide to make up later. But what about days you sit idle waiting for a higher paying load? You might be better off with a less-than-perfect load and not have to eat a week of fixed costs that just keep on adding up.

Once you know your fixed costs, it is no longer a guessing game. You can decide how long you can afford to wait for a specific load based on the known cost of the wait.

The two biggest items in the category of fixed costs are your mortgage on the truck and the variety of insurance coverages you need. Other items include your licenses, permits and accounting services.

Variable costs

Variable costs are expenses that are directly related to operating the truck. Generally, the more you run the truck, the higher your variable costs are. There are some economies of scale, however, and some variable costs will become less per mile as you increase your number of miles. Fuel, tires, maintenance, meals and lodging are examples of variable costs.

Cost of operations sheet

Cost Per Mile Spreadsheet

Our sample worksheet at right includes many expenses that truckers encounter in their businesses. It may not accurately reflect your individual operation, however, and you should adapt it to match your expenses before attempting to use it.

Fixed costs and variable costs are separated out in the form and then combined in the item at the bottom labeled “Total Vehicle Costs.”

The first column of figures contains the annual costs for each category. The second column divides the first column by 12 and gives you the monthly breakdowns. The third column is the result of dividing the annual costs by the number of miles run in the year.

The worksheet is both a reporting and a planning form. It will report your operation’s expenses, but it allows you to explore various scenarios with “Driver’s Income” and “Total Cost of Operation.” If you have determined a set driver’s income, you can tell what gross income level you must hit to support that income given your annual expenses.

The “Driver’s Income” entry is the primary reason we’re going through all this in the first place. Some drivers will enter a set figure of what they want to earn. Others will pay themselves a percentage of the business they do, so the more gross income they generate the more personal income they make.

As a rule of thumb, the driver should earn about 30 percent of the total gross revenue of the truck. The expenses should be the other 70 percent. Take the “Total Vehicle Costs,” divide by 70 and multiply the result by 30 to get the “Driver’s Income.” By adding the “Total Vehicle Expenses” and “Driver’s Income” you should have the total “Cost of Operations,” which should also be the total gross income for the year.

If your actual gross income was more than what is on the worksheet, congratulations, you made more for yourself than you planned on. If your actual gross income was less than what is on the worksheet, your “Driver’s Income” is the difference between actual gross income and “Total Vehicle Costs.” If it is less than 30 percent of the gross, you need to take steps to control your expenses or raise the gross, probably both.

Per mile costs decrease when miles increase

As the miles a truck operates increase, the cost per mile will decrease. Of course your driver income should also increase as you drive those miles, too.

This decrease of cost per mile with each additional mile is a characteristic that small trucking businesses share with the big fleets. Greater equipment utilization translates into lower per mile costs and the potential for increased net revenues and profits.

Keeping your business aloft
We’ll probably never see the day you can drive a truck from California
to New York without taking your eyes off the dash. The more financial data you analyze, however, the more likely you will be to make money on that trip.
Find the business questions you need answers to, and formulate a report that supplies those answers. Then adopt policies and modes of doing business that make you a better businessperson and watch the effects of those changes in your reports as you fine-tune your operation.
Use the reports to make sure you are controlling every single factor of your operation that you have any control over, and understanding all the ones that are beyond your control. Then you can exhale and maybe enjoy the ride, because the great view hasn’t changed a bit. LL

Costs per mile

Figuring out costs per mile is just one of several calculations you can do to get a better idea of what is going on in your operation. The beauty of these reports is they too use the same numbers you have already gathered, just assembled in a different way, to give you perhaps a different financial view.

Round-trip profits

The trip profit report summarizes the income and expenses of each round-trip made. This will average out the rate differences between legs of a trip and provide you with yet another view of how your cash flows. Also, when you begin to see that some trips are winners and some are losers, you can make a point of seeking out the winners and avoiding the losers.

Accounts receivable

In today’s business climate you are more likely to get paid when you threaten to sue than on the date the money is due. Shippers and brokers who owe you money are using you as an interest-free bank when they go past their due date.

If they don’t have the cash on hand to pay you, they could borrow the money to pay you, but that costs them interest. Simply not paying you costs them nothing, and they save the interest on the loan. Having a large accounts receivable balance can strangle your operation to death.

Keep your terms in writing, but if a customer is historically late in paying, you have a couple of options. One is to charge him a higher rate to make up the difference. The other is to quote a higher rate for his “normal” payment and then offer a discount for payment within 15 days.

If good-paying customers change the way they are paying, ask around and find the real cause of the change. There’s some wisdom in keeping your customer list diversified. Don’t let the failures of another company drag yours down, too. A good customer is one who has loads and who pays you on time.

Fuel ledger

Because fuel is your largest variable cost, small changes can have significant results. Making a change in your driving or equipment that adds as little as two-tenths of a mile more travel per gallon of fuel – 5.7 mpg instead of 5.5 mpg – can translate into more than $2,000 in annual savings. Fine-tuning every cost in an operation can make a significant difference in its profitability.

Daily or weekly cost of operation reports

If monthly reports cover too many trips to be meaningful, then figure your cost reports weekly or even daily. The trick is to put the numbers into units that you can relate to, and from which you can recognize problems and identify solutions. LL

Aug/Sept Digital Edition