Dollars & Sense
Profitable Expediting and Trucking
Throughout the past year and a half our tax firm has noted more bankruptcy and equipment repossessions than in our entire 27 years of preparing tax returns for the trucking industry.
What is the reason?
There are several contributing factors to the situation. First the economy went into recession, and then the 9-11 terrorist attacks occurred. There are ways to prepare for a recession, however, there is no way to prepare for the effects of a terrorist attack.
But now that we've been through both, we must learn to best prepare for the unforeseen. Another leading cause of bankruptcy and repossessions are business operation errors. Operational errors are something that can be identified and avoided.
Below are a few tips to help you operate more profitably. When an individual is self-employed he or she must use every tool at their disposal to ensure they are operating as profitably as possible. One of these tools is the ability to calculate both your revenue per mile and your cost per mile.
To determine cost per mile for your over-all operation you would divide your total cost of operation by the number of miles you ran. This should be calculated monthly and year-to-date to get the most accurate figure. Once you determine your cost per mile to operate your truck you can use that number to determine when a particular trip or load is profitable.
Let's assume your cost per mile is .79 cents. Next you'll need to know how to calculate your revenue per mile. Take your total revenue (income) and divide by your total miles. This calculation will give you your revenue per mile or in other words how much you make for every mile you run.
Let's say your revenue per mile is $1.40. Now that you know both your revenue and cost per mile you can calculate your profit per mile. Take your revenue per mile of $1.40 and subtract your cost per mile of .79 cents. That would tell you your average profit per mile is .55 cents.
Now with these calculations you can always determine in advance the profitability of a load. Take the total amount a job pays, this is your total revenue. Then divide by the number of miles the trip will take and you will have your revenue per mile.
Lets say a load pays $2,500. and the trip is 2,350 miles; the revenue per mile is $1.06. You now know it costs you on average .79 cents per mile to run. If you accept this job you will only make .27 cents per mile, that's less than half of what you need to match your average profit per mile.
When doing these calculations be sure you include all the miles traveled including deadhead. If you don't include unpaid miles you won't have an accurate number.
What is it costing you?
The cost to operate your business is something you want to continually review. The more accurate your expense records the more successfully you can manage your business. You must be able to project needed revenue vs. expenses. Will you have enough cash flow? Are you within budget? Will you be able to qualify for a loan? Is your cost per mile creeping up each month? Why?
The only way to increase your profit is by either cutting costs, increasing revenue or a little of both. A few cents shaved off your cost per mile can mean a lot if you run 100,000 miles a year.
It is important to be able to identify all your costs in relation to your operation. All business expenses no matter how small should be kept track of even though they may not be deductible for tax purposes.
For example, for meals on the road you may use the per diem allowance for tax purposes, however, when calculating cost per mile you will need to keep track of your actual meal expenses.
The importance of knowing your expenses
You should breakdown your costs into three types fixed, variable and individual variable. Fixed costs stay the same regardless of the miles you run. Examples would be equipment payment, taxes, license, permits, insurance, etc.
Variable costs are mostly operating expenses, and these will vary month to month. Examples would be fuel, oil, repairs, maintenance, tires, tolls, scales, etc. Individual variable costs differ with each individual operation. In general variable costs apply to most trucking operations where as individual variable costs do not.
For example you may pay driver wages and another trucker may not. You may do you own bookkeeping but your buddy may pay an accountant to do his. Even if you're not entirely sure what category to use be sure to keep track of every expense.
Now that you know what to do, how do you use it? Aside from using your calculations to determine the profitability of loads, you can also use the numbers to predict future costs, analyze past performance and cost out equipment purchase comparisons. When it comes to being successful, you've got to operate smart and use all the tools available to you. Consult your tax advisor for more information.
This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153.
Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.
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