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Costs, Costs, Costs
by Timothy D. Brady
Jul 6, 2005 4:20 PM
What you need to know to know the value of a load
In the real estate market, there are three things that determine the value of a piece of property – Location, Location and Location. In trucking, there should be a similar saying that determines the value of a load – Costs, Costs and Costs. Without knowing your costs, it is impossible for you to determine what you should be charging for shipments so you see a profit when the load is complete.
According to the Department of Transportation (DOT), hauling rates today are only 1% higher than rates in 1999. Insurance, fuel, and other trucking-related costs have continued to rise at a tremendously faster clip during the same period of time. In fact, these costs have moved over into the hammer-lane and the pedal is to the metal. Although shipping rates and driver pay have both increased on average about 6% to 7%, it has not been enough to reverse the trend of cost increases over the past several years.
In order to calculate what price you need to charge for a product or service, a successful businessperson is required to know two factors:
What is my load break-even point per shipment?
What do I need to charge each customer to reach these points?
As owner-operators and small fleet operators, it’s imperative to know every one of your costs and how they relate to each break-even point. One of the largest misconceptions in the trucking industry is, “All I need to know is my cost per mile and when I’m receiving a hauling per mile rate that is higher than my cost per mile, I’ll make a profit.” Another misconception is, “I don’t have to make a profit on every load to be successful.” It would be nice if it was that simple, but it’s not. Saddled with these two fallacies as a business concept, your trucking operation will fail.
Most drivers figure their cost per mile by taking their entire year’s expense total and dividing it by the number of miles they drove that year. The problem with this method is, if you take that cost-per-mile factor and attempt to relate to a load you are considering hauling today, the results of your calculation will be askew.
The reason is simple and can be answered by one question: “What did you pay for fuel, tires, and maintenance a year ago?” Those numbers are not related to what you will be paying for those items today. Example: Fuel a year ago was $1.79 a gallon; fuel today is $2.40 a gallon: your average fuel cost per gallon for a year would be $2.09½. You’re going to travel an estimated 3,000 miles on the next load you’re considering. Just in your fuel costs alone (based on 5 miles to the gallon), your cost calculation would be $183.00 short of what it will really cost you to haul this load. Add this to the other expenses that have changed over the past year, and you could be taking loads that are a losing proposition and not even know it.
It’s very important to keep up with what it costs you to pick up, transport, and deliver each load you haul and how it stacks up against the money you’ll receive on the load. To do this you must use the most recent figures available in your cost-per-mile categories. These categories include any expense item that occurs once you have turned the key to the ‘On’ position and started your truck engine. You should look at expenses such as fuel, PM service, truck washes, fuel and ton-mile taxes that you paid last month. These should be divided into the actual hub miles you covered in that month. Other cost per mile expense categories like tires, major repairs, non-truck equipment repairs, etc. should be spread out over the expected life of the item.
Example: You purchase a set of steer tires for $700. The tires’ expected useable life is 12 months (one year). You would divide the $700 by 12, so your steer tires are costing you $53.33 per month. Cost per mile is important when calculated in the correct manner. If it’s figured incorrectly, it will only create financial havoc in determining profit potential. To accurately calculate your cost per mile as it pertains to each load, you take the most up-to-date totals of your cost per mile expenses (I suggest last month’s totals), add them all together and divide them by the number of hub miles you traveled that month. The answer is your current cost per mile. It’s very important you recalculate your Cost per Mile at the beginning of each month using the previous month’s cost per mile totals. Now you have the first factor in figuring your load break-even point.
Another area of expense categories needed to calculate your break-even point is the fixed costs, or as I call it, Cost of Ownership. Items which belong in this area would be any outlay that occurs while the truck is sitting idle. In other words, if it has to be paid while you’re on vacation, it’s considered a fixed cost. Some of the items that need to be in this area are: truck insurance, base plate, FHUT (Federal Highway Use Tax), loan and credit card interest, equipment depreciation, internet fees, cell phone, business taxes. Some of these items are paid just once a year, some are paid quarterly, others monthly, and others are even paid out weekly.
The easiest and most effective way of arriving at your Cost of Ownership per day is to list all your fixed cost expenses in the month they occurred in the correct category over the last twelve months. Total all twelve months of each category, and add each of these category totals into a single total of all your fixed costs over the past twelve months. Divide this total by 365 to arrive at your Cost of Ownership per day. Now you have the second factor in figuring your load break-even point.
The final area is called Shipment Specific Costs. These costs don’t apply to every load or shipment you haul but come into play on specific loads. This area includes such expense categories as tolls, labor, special equipment costs, special permits, etc. It’s very important to list these expenses separately from your Cost per Mile and your Cost of Ownership. If these expenses were factored in to either one of these areas, the resulting answer would be incorrect, because these Shipment Specific Costs apply directly to the load to which they are being expensed. The importance of separating your costs into the correct area is critical in determining the true profit potential of any load. Now you have the third factor in figuring your load break-even point.
Now that you’ve figured the totals for your Cost per Mile, fixed Cost of Ownership and your Shipment Specific Costs, all that is left is to determine the amount of time and the number of miles required to complete the load in question. The most important item in determining each load’s potential, is knowing how what you will be paid compares to what it will cost you in both money and time to complete.
Ask yourself:
What is the total revenue I will receive for the entire load?
How many days/hours will it take me to complete this load?
How long did I sit between loads? (days/hours)
What are the actual rolling miles to be covered by this load?
What are the Shipment Specific Costs?
By having correct answers to these questions, you will begin to analyze each load’s profit. This enables you to make the ‘thumbs up or down’ decision as to whether a load is worth your time and effort.
You, as the owner-operator, are a trucking business executive. To manage your truck like a business executive, the money you receive for hauling each load must be in line with your costs in order to be assured profit is made when the load is complete. Remember, it’s your truck, your business.
For more information on this subject and other trucking business subjects go to www.truckersbookstore.com
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Originally Posted by Rev.Vassago
