Cutting cost vs. increasing revenue

[allan5oh]

I posted this on another website(www.kevononxm.com) but thought I'd post it here too:



I want to have a constructive debate regarding this formerly "hot topic".

First, the numbers:

Average yearly profit in CPM of owner operators 45 CPM

Average fuel mileage 6 mpg.

Average fuel price of $2.24 per gallon

I'm guessing at these numbers, but I remember seeing the profit in a magazine, straight from ATBS. It was around there.

Now let's make him an "above average" owner operator. Suddenly he averages 7.5 mpg:

37 cpm for the 6 mpg driver
30 cpm for the 7.5 mpg driver

A difference of 7 CPM. Let's add a couple more "differences" and push it up to 10 CPM. Say he extends oil drains, and does some work himself.

So the "average" o/o makes a profit of 45 CPM, and the above average makes a profit of 55 cpm. Now let's compare that to a company driver. I'd say the average company driver makes about 45 cpm including all benefits.

Do we feel that the increased financial risk, essentially zero job security(most o/o contracts I've seen have a 30 day "either party can cancel" clause) is worth 0-10 CPM? I don't think it is.

Now get ready for this. I'm going to toss a nice number out there. I feel most o/o's should profit somewhere in the range of 80-100 CPM. Considering our increased financial risk and complete lack of job security, this isn't out of the question. Especially if one has a paid off truck and gets good fuel mileage. In our current "average" or "above average" situation this kind of profit is almost impossible.

That's where increased revenue comes in. Open any o/o recruiting magazine and you'll notice a huge variation of pay, from 85 CPM + FSC all the way up to 85% etc...

So to me, cutting costs is always easy. But I feel it is not very rewarding. The "tough" part of making that extra 30-40 CPM is always increasing your revenue. That may mean searching for the "perfect job". When I was laid off in October, I spent about 5-6 weeks looking for a new job. I simply didn't want to work for a buck a mile plus FSC any more. I found that job and it pays better then any other job I've had in my life. Even during this so called "recession"!

So what do you folks think?

That's not to say that cost cutting will help anyone save money. Of course it will. It's just that you hit a wall very quickly. After that, you simply have to focus on revenue. My truck averaged 7.7 mpg in 4th quarter 08, is paid off and I do about 95% of the work on the truck. Where else can I cut cost?

Of course the best businesses out there always focus on BOTH sides of the spectrum. Having the largest spread between "cost" and "revenue" equals the largest amount of profit!

[GMAN]

You could save on parts such as tires by finding a distributor who will give you good pricing or get involved with a national tire account where you can purchase tires on the road at a lower price. You may also see if you can get some discounts where you buy parts. The truth is that many owner operators make about the same or less than some company drivers. The advantage an owner operator has in this situation are the tax benefits. He may pay less in taxes which could result in more net income. You need to save where you can buy a business cannot survive without revenue. If you work on percentage you could increase revenue by staying in the better traffic lanes or refusing to haul freight unless it met your minimum haul threshold.

[solo379]

First, let me correct you, that your definition of "profit", is totally wrong. Profit, it's what left after all expenses, including your earnings as a driver.
Second, it's not all about the money...
And last;-what's to discuss here? Make as much as you can, spend as little as you can, or comfortable to.
That simple! Oh yeah! And of course revenue increase, has more potential, than cost cutting, in general!

[allan5oh]

First, let me correct you, that your definition of "profit", is totally wrong. Profit, it's what left after all expenses, including your earnings as a driver.

I've had that discussion here before. As a sole proprietor you're definitely wrong, as any profit immediately goes into your income. As a corporation you're correct.

But I want to compare apples to apples. The only way you can do that is if you include your wage or salary in profit.

This was more written for Kevin's site then this site. When his site first started, everyone was obsessed over fuel mileage. There were a few folks that said "fuel mileage don't matter, revenue is everything".

I don't see that disagreement over here as much. But I posted it here just for the hell of it.

[Hoyt602]

I am not a regular listener of Kevin. I saw him in Dallas this past summer when I was exhibiting at GATS. His show seems to be aimed at reducing expenses and operating costs not increasing gross revenues. Most of his information appears to be geared to the "leased owner/operator". The majority of which have one truck and probably run under a mileage or percentage program. They will be limited in their gross revenues by the HOS regulations therefore having an artificial ceiling. The only to increase net revenues are to decrease inputs. The information on his show is probably good information for that. I don't know the validity of his vendor sponsors and their product claims, but it is sound advice to lower your operating costs whenever possible. From what I've seen and heard so far, his show is not aimed at marketing and developing a transportation business. There is nothing wrong with that. Stick to one thing and do it well. I believe in the increasing revenue slant and sometimes you have to spend money to do so. And honestly, I totally don't remeber where I was going with this reply...

[solo379]

The only way you can do that is if you include your wage or salary in profit.

Than you should call it a "net income", to avoid a confusion. Cause "profit", or "ROI", for some folks (me included) means different.

They will be limited in their gross revenues by the HOS regulations therefore having an artificial ceiling......... And honestly, I totally don't remeber where I was going with this reply...

That figures....

[Graymist]

Does your 45cpm take into consideration driver pay ? In the sense that, if you were to pay yourself a salary for driving your truck, would you still arrive at the 45cpm figure ? I wonder if most o/o incorporate this aspect into their cost structure.....but then, I could be wrong....I'm just a company driver.

[rank]

Chalk me up as another who separates driver pay from profit. There is no other way to establish if your trucking company is making a profit.

[allan5oh]

it's all symantics anyways, it all goes in your wallet and is taxed.

[b00m]

Run fast and run hard.Keep your expenses at a minimum,negotiate on everything and have a decent broker to work with.That's the key to survive in this business.Nothing else to add.

[allan5oh]

Than you should call it a "net income", to avoid a confusion. Cause "profit", or "ROI", for some folks (me included) means different.

According to the IRS and CCRA, if you're a sole-proprietor the profit is your net income.

[solo379]

it's all symantics anyways, it all goes in your wallet and is taxed.

Yes. But to avoid confusions, you should have mention it. Here is an example....

Does your 45cpm take into consideration driver pay ? In the sense that, if you were to pay yourself a salary for driving your truck, would you still arrive at the 45cpm figure ?

[dobry4u]

According to the IRS and CCRA, if you're a sole-proprietor the profit is your net income.

Actually on Schedule C line 31 (of the 2008 form) defines it as profit/loss.

Which rolls up to line 12 on for 1040 (2008) which further is defined as adjusted gross income.

A quick rule of thumb. If speaking of the "business" you use profit/loss

in speaking of the individual it is income. HTH

[lowrange]

Great OP. Great because of the realistic numbers for what O/Os are actually doing, great for the realistic expectations for cost cutting and highlighting the other side of maximizing profit.

You totally blow me out of the water in just about every aspect of the profit equation. Before Christmas, I was really concerned about having a contract when I came back. Even now, though my numbers aren't in the same ballpark (I'm that $1 plus fsc guy, pulling heavy...) I'm single-minded focused through August when I ought to be completely out of debt (or, nearly so). For me, being out of work and parked is the major concern right now. I can make it if I keep going at my current rate (paid deadhead, generous layover and detention...) Once I get over my personal hump (debt), once the country gets over our collective hump(*ession, choose your prefix), I'm with you- where's the money!? Where's the revenue!?

Until then, it's the bunker mentality, it's the survival mentality, it's 'how can I be one of the truckers still making a living?' This guy, one of so many, he calls Kevin's show and says I'm just making my truck payment and paying my insurance...oh noooooo...don't want that!

[chris1]

If you have a decent accounting system you should be able to run a "cash projection". Then you can enter a value for labor with all the associated costs(tax,comp,umc,ect)
This also eliminates any depreciation ect so you only have cash flow.

[allan5oh]

Even now, though my numbers aren't in the same ballpark (I'm that $1 plus fsc guy, pulling heavy...)

I'm not pretending it's all roses. I make about $1.32 + FSC right now, but I had to buy a trailer and now I pay insurance. That's $1500 a month. I'm only making about 15 CPM more then I was. But it's still more. There's always an option for percentage at this company. But if you think about it, 15 CPM is more then I could ever save pinching pennies.

I can make it if I keep going at my current rate (paid deadhead, generous layover and detention...) Once I get over my personal hump (debt), once the country gets over our collective hump(*ession, choose your prefix), I'm with you- where's the money!? Where's the revenue!?

I'm in a similar situation. I do have lots of debt. I was not working enough at my previous job and had a credit card balance just above 4 digits. That shouldn't have been there. I was basically living on the edge just doing enough miles to get by. I did plan on ramping up the miles but then I was canned. It was sheer boredom of dry van that caused that.

Until then, it's the bunker mentality, it's the survival mentality, it's 'how can I be one of the truckers still making a living?' This guy, one of so many, he calls Kevin's show and says I'm just making my truck payment and paying my insurance...oh noooooo...don't want that!

That's true, right now you don't want to be switching companies. So maybe focusing your energy on cutting cost is a pretty good idea, instead of the revenue side.

[allan5oh]

Actually on Schedule C line 31 (of the 2008 form) defines it as profit/loss.

Which rolls up to line 12 on for 1040 (2008) which further is defined as adjusted gross income.

A quick rule of thumb. If speaking of the "business" you use profit/loss

in speaking of the individual it is income. HTH

So in other words, line 31 equals line 12(unless you have other income). So they're the same. You can call it all you want, but my point was you need to "equally" compare two different jobs.

[rank]

It was sheer boredom of dry van that caused that.

You shouldn't have that problem with a step deck.

[Triple Digit Bob]

I'm not pretending it's all roses. I make about $1.32 + FSC right now, but I had to buy a trailer and now I pay insurance. That's $1500 a month.



The trailer payments and insurance on my trailer are 750.00 a month. 500.00 a month on the trailer and 250.00 for the insurance and that insurance includes my truck too. What is your FSC? .20cpm? I averaged .23cpm more than that and I still don't think it is enough. Unless you run over 120k miles a year the .15cpm difference versus not having a trailer and dealing with it's headaches would be better.

[rank]

....you need to "equally" compare two different jobs.

That's kind of my point. What I am saying has nothing at all to do with tax law.

If, after you pay all your bills and "pay yourself" a fair wage to drive, you still have money left over, then you have shown to yourself that your trucking business has just turned a profit. If you have no money left after you pay your bills and pay yourself, you do not a have a trucking business, you have bought a job.