Business of Trucking: Driving revenue
February 06, 2013
by Tim Brady
Don’t fall into a trap of setting rates based only on miles driven
There is a misnomer when it comes to any discussion about increasing a trucker’s revenue per mile. The fact of the matter is, what you make per mile in a trucking operation is of no importance.
There’s a factor that makes this a moot discussion. You can control specific cost-per-mile items like reducing your use of fuel through different conservation measures such as idle reduction, rolling resistance, aerodynamics, and a comprehensive preventive maintenance program that nips any major repair in the bud before it becomes costly. But take note, while these are important in controlling expenses, all are per-mile costs that won’t increase your revenue per mile.
There are other expenses that can’t be calculated per mile—and these are your fixed costs.
Fixed costs, by their nature, are based on time. Most tractor and trailer lease or loan payments are based on per month, per quarter or annual payment schedules. The same can be said about office rent and other monthly, quarterly and annual expenses related to your trucking operation. While it’s possible to drill down expenses related to the rolling operation of a truck to a per-mile basis, it’s not possible to do the same with costs that are based on time.
Fixed costs can be a bigger enemy to your profitability than rolling costs because fixed costs must be paid even when a truck is idle. If the truck is parked and not producing revenue, it still requires insurance, truck payments, registration, and other time-sensitive cash outlays to be paid. But operational costs such as fuel, maintenance, tires, and repairs only occur when a truck and/or trailer is moving.
Many trucking companies will figure the revenue they need for a load based on a per-mile figure, which is calculated by adding all the costs (fixed and operational) over a period of time and then dividing that number by the number of miles their trucks traveled during the same period. They may also take only the operational cost of a truck (driver pay, per-mile fuel, tires, maintenance, repairs, truck payment, insurance, base plate and federal highway use tax [FHUT]) and divide that number by the miles the truck has traveled to arrive at a cost per mile. They then add a per-mile profit margin to arrive at a single rate per mile figure they’re going to charge their customers.
There are several reasons this methodology doesn’t work.
Let’s take a look at a formula that will explain this. We’ll assign the following costs to a theoretical truck to use in the formula:
Fixed cost per day: $300
This includes truck and trailer payment, insurance, base plates, and FHUT, along with expenses divided equally between all the trucks the trucking company owns such as office expenses and rent, office personnel salaries (including the owners), and any other shared fixed costs that are needed to operate the company. Total fixed expenses over one year are divided by 260 days (5 working days a week for a year). The vast majority of trucks don’t generate revenue for 365 straight days because of HOS restraints.
Operational cost per mile: 10¢
This includes tires, maintenance, and repairs of a specific truck. It’s best to look at what the total cost was for the previous 30 days, with any tire replacement or major repairs in excess of $500 amortizable for each truck’s anticipated life. For example, amortize $800 steer tires for 12 months to arrive at a cost of $66.67/month. Divide the total spent the previous month plus the amortized items by the odometer miles covered in that month to determine the cost per mile.
Fuel cost per mile: 67¢
For this formula we’ve priced the fuel at $4/gal. and based it on a truck getting 6 mpg. To calculate your fuel cost per mile, divide your truck’s mpg into 3,000 mi. to arrive at the gallons required. Multiply your total gallons by the current price per gallon for fuel. Take the total cost of the fuel and divide it by 3,000 mi. to arrive at your fuel cost per mile.
Our cost per day is $300; our cost per mile is 10¢ plus 67¢, or 77¢ per mile total.
Based on these figures, I’ve calculated the two scenarios (Example A and Example B) to indicate the wide range your cost per mile could be based on how many miles the truck travels in a day.
As you can see from Example A, we’ve got a cost-per-mile range from $1.27 all the way up to $300.77. In other words, the fewer miles your truck travels, the higher the cost per mile.
Let’s take this one step further. We know it’s not uncommon for a truck and driver to sit an extra day to get the next load or to have to carry a 1,000-mi. load over a three-day weekend. We’ll add one additional day to each of the distances to see how it impacts the per-mile cost (remember that the fixed cost per day of $300 is now doubled). This is reflected in Example B. Here, the cost per mile ranges from $1.77/mi. to $600.77/mi.
As you can see, sitting to wait for a better paying load will increase your cost per mile very significantly.
The bottom line? If you want to increase your revenue per mile, focus on the time it takes—not just the distance traveled.
Contact Tim Brady at email@example.com or call 731-749-8567. Join Brady in the Trucking Business Community at www.truckersu.com.