Cutting cost vs. increasing revenue
 

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!

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.

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!

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.

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...

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

That figures....

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.

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.

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

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.

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

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

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

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!

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.

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'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.

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.

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.

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

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.

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.

It's like Allan5oh said, it's largely a matter of semantics and it's been debated extensively here before. That debate could be repeated here now, but it's already been done. Besides financial issues, there are quality of life issues that are different between O/Os and company drivers. Everyone will have his own ideas about what those quality of life issues are and what they are worth.

Really, you can think of it both ways, and it's probably helpful to consider it from both angles, too. Just, when you're having a conversation, everyone needs to know which 'paradigm' is prevailing in that conversation.

Back to the subject of revenue, the O/O maximizes revenue with his one truck, and then what's next? Beginning to add trucks is one obvious route, are there any others? Let's say an IC gets a trailer and gets his own authority and even gets his own customers, that's pretty much the end of line, right? After that, if you want more money, it looks like you need a second truck.

Rutherford claims that ICs often do as well as guys with their own authority. Is there any magic formula for maximizing profit off a single truck?

Trailers are pretty low maintenance IMO.

overall the difference is 30 cpm, but then considering after cost it is 15 cpm or so. I pay insurance whether or not I own the trailer.

Yes. Haul the biggest ugliest freight you can find.

Well then, what's bigger and uglier that 45,000lbs of snot (a tanker thing)!? I guess I'm there, then. :lol:

Nah, I'll probably do the best I can with one truck and leave it at that. Quite honestly, getting rich hasn't been a goal of mine for many, many years. After getting as much as I can out of one truck, growth for me will more likely entail repenting and getting closer to the Lord.

You are much better off just having one truck unless you can go out and buy several. It is difficult to make a profit with a couple of trucks when you have drivers. Finding quality drivers is challenging. It is getting better with the economy, but drivers move around. That creates a challenge for the small operator as does a driver who doesn't take care of his equipment. If you decide to buy more than one truck you need to be realistic about your expectations.

That's good to hear coming from someone who knows. I seem to be near the end of the line as far as what you can do in this profession. I have no intention of climbing the heavy hauler hierarchy. Tankers don't own their own trailers or operate in their own authority. And, for the van guys who do have their own trailers and authority, I'm not convinced they're doing better than the contractors- maybe, I guess. I'd like to hear more from the small fleet owners on the board and whether or not they think it's worth it.

Don't worry, judging on your previous posts, you still got long ways to go! And even when you are at the "end of the line", it's still an everyday challenge to stay there, trust me!
And i absolutely agree with Gman, about "second truck issue"....

I am fortunate that I don't have big equipment payments. When the economy is down you can make money hauling cheaper freight as long as you don't have to pay a driver. I would suggest you buy at least 3-5 trucks as quickly as you can economically do so. There are several reasons why I would suggest this action. First is driver turnover. It isn't always easy to find a qualified driver to put in your truck. If you only have 2 trucks and lose one driver then your income drops 50%. If you have 5 trucks and one sits then 20% of your income drops. Economies of scale can also help you on things such as fuel discounts. You may not qualify for deep discounts but some truck stops such as Flying J will give you a discount on monthly fuel purchases. It is much easier to qualify for those discounts with 5 trucks than 2. You may also qualify for discounts on parts at stores such as Fleetpride or even some dealers. When you buy more than one truck it is difficult to drive yourself. Unless you are a good manager and like to dispatch you may not want to get into buying trucks.

I don't mean knowledge in the profession, not at all. I'm talking about earnings, owner operators make just so much. Oh, I know about Brian in the oil fields, BanditsCousin hauling specialty freight, etc., etc., there are certain gigs that only a few will get that pay large, but I'm not living my life to position myself to be one of the chosen, and to do whatever it takes to keep such a coveted position.

For instance, let's say you had a goal to make $200,000 net profit before taxes doing something, and many Americans make that much, you couldn't do it with one truck. Take Rutherford, the guy must make millions, or at least that's where he's headed, he didn't get there by simply staying within the box. With the things he knows and the abilities he has, there are so many ways for him to make money he has to choose which pitches to swing at. Apparently, large companies have offered him executive positions to come onboard and lead them in the things he's teaching. He didn't want that, he wanted radio for whatever reason. Now, he's releasing a constant stream of products from teaching DVDs to Signature trucks.

I couldn't do all of that, but I've got family who are doing well in real estate. I'm just saying there are many possibilities in life, but you're going to do just so much with a single truck. I'm personally not inclined to buy more trucks and manage drivers, so, I don't see a lot of growth potential for me unless it's in some other field. As I've said before, the money with one truck may be sufficient for me, and the time alone in the cab to listen to books, to think and to pray may be my best opportunity for growth- just not necessarily financial.

Are your trucks sitting right now, Gman?

See, I've often longed for a place big enough to park a truck and a trailer, but I don't have it. I definitely don't have a place big enough to park a small fleet and have my own shop. Add to that all the paperwork. I don't have a spouse at home to handle a lot of that, and I'm not organized enough to keep my own truck on the road and do all of that, too- fuel taxes, hiring drivers, making payroll, finding loads...Man, it's so much! Is anyone able to do that without at least a spouse working full-time anchoring things at home? Nah, I'm not in a position to expand. But, it's still interesting to hear from those of you who have and how you've done it.

One truck is sitting. I am trying to find a driver. Another is sitting more than I would prefer. I won't run my trucks for less than it costs to operate and make a profit. There are loads this morning for as little as $1/mile or less. Some poor guy will likely take them eventually. Some seem to fly off the boards about as quickly as they are posted. Some people with whom I deal don't always post their loads, but even those are cheap compared to what we have been accustomed to seeing. Some people have a choice of taking a load that pays little or no profit or sitting. Personally, I prefer sitting if I can't make something on a load.

It helps to have a spouse help with the paperwork and to hunt and book loads. Finding decent paying loads is a full time job in itself. I know a number of owners who got rid of their authority and lease to another carrier just to get rid of the paperwork. Some people make as much or more leasing to a carrier as they would running their own authority. You need to be very organized to run this type of business. In fact, any business requires a certain amount of organizational ability. It should not make any difference which way you decide to go. It is less stressful for some to lease rather than run their authority. Just do what makes you most comfortable. Whichever way you can enjoy what you are doing and make a good living is the way to go.

I appreciate it, that's what I thought. I don't know how many O/Os I've met whose wives evidently know more about their numbers than they do. As long as I'm operating a truck, I won't try to put on another. The subject is 'increasing revenue', and it looks like we've gone over a lot of the options.

So, even in today's climate, you're trying to keep all your trucks running?

Yes! But the main question, you should ask yourself;-Am i comfortable with it? If answer is "Yes", that solves the problem. If "No", than go ahead, explore the opportunities. Just remember,-There is no such thing, as a free lunch.

:( I was hoping I could come live with you and sleep on your couch...

:)

Anytime! But didn't i just told you about "free lunch"?

:clap: Doesn't sound like much of a vacation, Solo. I'll pass.

Hey, are you back to work yet?

Not yet, couple more weeks, may be....
http://i6.photobucket.com/albums/y21...ajestic029.jpg

Is that your morning breakfast, before doing 700 miles in a day?

Wouldn't trust you on my six that's for sure!

LOL, just kidding good buddy.

He isn't doing jack. ;)


Debonair, Solo, looks like a good life! What kind of cigar is that?