Dollars & Sense
Today's business environment is the toughest we have ever faced. We are receiving more questions then ever regarding the profitability of operations.
By far, the most common question we get is, with certain loads paying much less than I'm use to, how do I know my haul(s) will make money?
The most important facet of your business, obviously, is operating at a profit. However, we are seeing companies operating at a loss. Why? Because care was not taken to ensure that their operations, their hauls, would gross enough money to pay for their expenses. There are two major groups of expenses. Variable Costs would include fuel, repairs, parts, tires, tolls,oil, lumpers, scales etc. The other group of costs are Fixed Costs. These would include payments on your equipment, insurance,license,permits,professional fees etc.
In order for you to know if your hauls are going to make enough money you must calculate your expected revenue per mile and then your cost per mile.
Q. How do I compute my revenue per mile?
A. To determine your revenue per mile you would need to divide your total revenue expected by the number of miles expected to be driven for that haul.
Q. How do I compute my cost per mile?
A. Divide your total costs (Fixed and Variable) for your last quarter of operations by the total miles driven over that period. You should also do this for your last twelve months of operations. This will give you a good indication of your cost per mile. You then can compute your expected profit for a particular haul.
Q. How would I do that?
A. Deduct your costs per mile from your expected revenue per mile. That will give you your expected profit per mile. You can then evaluate if the profit is enough based on your personal needs. If the expected profit from the haul will not meet your personal needs then you must try to somehow lower your costs or look for a higher paying haul.
Now that I know how to compute my revenue and costs per mile, what should I do next? 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?
Q. How can I increase my profit?
A. 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.
Q. Now that I know what to do, how do I use it?
A. 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.
We know it's a tough business climate but ultimately you would need to decide for yourself whether to take on a particular job. Remember, you also must keep an eye in the future when deciding to accept or decline a load.
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This article has been presented by PBS Tax & Bookkeeping Services, a company that 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. See our website at www.pbstax.com .
Please remember 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.