Dollars & Sense – June 2009
To really focus on the bottom line, as I discussed last month, you need to monitor costs closely. One of the best ways of doing so is to figure your cost per mile.
The calculation is relatively easy. Knowing how to apply CPM to your operation is more involved. There are variables to be considered and many ways to interpret and use the results.
To calculate CPM, you need exact miles driven, fixed costs and variable costs for a specific time frame. Fixed costs are those that don’t change from month to month and have nothing to do with how many miles you drive, such as your truck note. Variable costs are just the opposite – they vary with the miles you drive. Fuel is the clearest example.
Basic fixed costs include:
· Bobtail and physical
· Health insurance
· Worker’s compensation
(if you have a fixed rate)
Basic variable costs include:
· Lube and oil change
· Truck washes
· Meals and entertainment
· Scale fees
· Utilities (phone, pager, wireless Internet subscription)
· Office supplies
· Legal and accounting fees
· Worker’s compensation (if you have a variable rate)
Any cost associated with your busines could be included. This will mainly be determined by how you plan to use the information.
The main ways to use CPM are:
· Tracking business performance
· Evaluating cost-cutting strategies
· Deciding when to buy new equipment
· Comparing contracts between companies.
Another use is for owner-operators paid by the load, percentage of revenue or on a variable mileage rate. Knowing CPM brings a uniformity to understanding costs from varied hauls. It helps determine total cost to operate and the profit on any given load.
Along with CPM you should also figure your true revenue per mile by dividing your total revenue by your total miles. Subtracting CPM from revenue per mile leaves you with your net per mile, that is, what you are earning.
An example of using this information would be in the case of deciding whether it’s time to buy a new truck. Buying new equipment usually will raise your fixed cost per mile because you will borrow more to pay off a more valuable asset and insurance costs will rise. One thing you need to determine is how much the new truck will lower variable CPM by reducing fuel and maintenance costs. Ideally, this will offset higher fixed costs.
If you use a computer for your record keeping, writing a spreadsheet for CPM is a great way to quickly see the results. If you don’t have the time or the desire to track your costs, consider a bookkeeping service that can produce these reports and help you interpret them.