Dollars & Sense

Why Owner-Operators Fail

With high fuel prices, rising insurance and equipment costs and an often grueling schedule, finding success as an expedited owner-operator is not easy.

New owner-operators can be especially vulnerable in the initial period after they take the plunge into ownership.

“The trucking industry does not cultivate and nurture drivers,” says Owner-Operator Independent Drivers Association Executive Vice President Todd Spencer. “It simply chews them up and spits them out.”

Among the reasons why owner-operators fail are:

*A catastrophic breakdown occurs and there's no money set aside for repairs
 
For owner-operators, regular truck maintenance should be a regular habit.   Improperly or poorly maintained trucks are one of the primary reasons why owner-operators go under.  A blown engine certainly qualifies as a catastrophic breakdown.  Do you have enough set aside for a new engine or a rebuild?

A recent trucking magazine survey found that:

-Fifty-seven percent of the owner-operator respondents have established emergency funds, averaging $11,500.

-Among those who have established such a fund, about six in 10 consider the size of their fund to be right: $13,600.

Owner-operators say the emergency fund should equal about a third of a year's operating income (revenues minus expenses). 
 
-Among the 36 percent who feel their emergency fund is too small, the average size is $5,000.

John Skinner is a two-truck expedited owner-operator who tells us, ”What people recommend to me is having two months of expenses put away - truck payment, insurance, maintenance, etc. My goal is to put away three months and I'm working hard to accomplish that.  When I started my business, I started with no money, so it's taken me this long to get to this point."

To be sure, saving for the unexpected requires a lot of discipline.

But its always better to pay for emergencies with cash that's been earning interest for you rather than with cash for which you'll pay someone else interest.

*Failure to understand the revenue-cost equation

The inability to understand the revenue-cost equation is just a symptom of a larger problem: lack of essential business skills.  When drivers become owner-operators, they become owners of small businesses.

According to the experts, one of the most important components of successful business and monetary management is knowing your Cost-Per-Mile (CPM).

There are a few prime reasons to be aware of CPM.  First, all of your costs are directly tied to CPM. You can't accurately forecast your weekly or monthly net income unless you know your CPM. This includes your revenue, fuel surcharge, fuel costs, road & fuel taxes and other expenses.
 
The second reason CPM is essential is that it gives you a basis for comparison - current figures to past, to other owner-operators, and to industry norms.

A third great reason for CPM-awareness is in your daily operation. 

You will often receive load offers that, at first glance, seem to be profitable. If you know just how much it costs to run your truck, it will enhance your decision making process and help you determine whether that load is in fact, a good choice.

*Failure to pay taxes

Neglecting tax responsibilities is another key reason owner-operators fail.

Taxes can be confusing. Depreciation, deductions, exemptions, leases, business structure and simple record keeping all come into play. A home office and a self-employed spouse increase the complexity. But shirking this responsibility will lead to legal trouble, steep fines and interest charges, overdue taxes and, ultimately, business failure.

As an owner-operator, you must make quarterly and year-end tax payments and because estimating taxes is complex, most successful owner-operators seek help from an accounting professional who specializes in trucking.

Without such guidance, certain factors affecting your tax situation, such as depreciation, can be difficult to understand.

Avoid tax problems by working with an accountant or business consultant who understands trucking and who will remind you of quarterly tax payments — and who will warn you if your operation isn’t generating the income to make those payments.

A good trucking accountant can explain the ins and outs of estimated taxes and depreciation, as well as provide regular financial statements to let you gauge the success of your business.

*Money wasters

In addition to the ways that an owner-operator can fail we've covered already, the expenses of the road are also at the top of the list.  These are the needless expenses that, with a little self-discipline, can be eliminated and that money can be kept in your pocket.

Driving habits
Speeding is a real money waster and it amounts to "money out the stacks for fuel, excess tire wear, excess engine wear, excess stress on the driver.  Or, as one veteran professional driver puts it, "Speed will cost you more money than you can ever recoup."

Administrative and transaction fees
Watch those ATM, fuel card, etc. fees! How many advances do you take in one week's time? Do you know how much you're charged for each one?

"This is one of the easiest ways to spend your money and have absolutely nothing to show for it," says one expedite veteran.

Unneeded truck accessories and other toys
Driving a tricked out truck is great, but most expediters we talked to labeled extreme chrome, souped-up CBs and other bells and whistles as the wrong place to put your money.  But mostly you have to ask yourself if chroming out what you drive will make you money.

Impulse buying and truckstop shopping
"If you are going to make money as an expediter," says one owner-operator's wife, "you must be able to walk through a big truckstop and not come out the other side with a booklet of horoscopes, a mood ring, a one-day packet of ginko biloba and a giant oatmeal cookie."

Many truckers cited truckstop shopping as a prime money-waster. You can buy just about anything there but at twice, sometimes three times the price you'll pay somewhere else. You pay dearly for the convenience.

One owner-operator put it simply when he said, "Bottom line, we can make or break ourselves when it comes to how we spend our money and where."

Eating on the road
When you eat out 24/7, you're at the mercy of somebody else's cooking. You need good food, and you need it quickly, making fast food and all-you-can-eat buffets tailor-made for a driver. 

The expediters we consulted say hitting the buffets a couple times a day is not only a big waste, but eventually those poor eating habits can add up to costly medical bills.

Are you a snack addict? Do you eat $6 worth of coffee, snacks, soda, bottled water a day? Sounds cheap, but that's more than $2,000 a year.

A number of expediters that we talked to say that cooking in the truck is the best way to trim those restaurant bills and eat healthy at the same time.

Credit cards
Buy-now, pay-later credit card mantras sell a lot of merchandise, but they also get a lot of people in hot water with more debt than they can handle. Plastic makes it just too easy. Before buying anything, ask yourself, "Can I afford it?" Purchasing anything you can't afford can put you out of business.

Low introductory rates only last about six months, and then shoot-up to 20 percent or higher. "No payment until next year" doesn't mean no interest or finance charges.  Credit can be a lifesaver, but it's not free.

"We learned the hard way that if you rely on credit cards, that's one of most devastating and expensive things you can do to yourself and your credit," say expedite owner-operators Ray and Joyce Phillips.  "Good credit is a precious commodity that you don't want to lose."