A 12-month budget is the most critical tool in showing where you’re headed financially.
Good business sense is not something you can simply switch on. But it’s not as difficult to practice as you might think, as long as you’re willing to put some time into planning.
Although business plans are often crucial to an entrepreneur’s success, accountants and small-business consultants say few small-business owners bother to produce one. This is especially true of truck owners.
“I’d say less than 10 percent of owner-operators have ever made out a business plan,” says Jeff Amen, who runs American Truck Business Services with his brother Todd. “They become owner-operators with a company driver mentality. They don’t understand revenue and expenses and the business aspects of being an owner-operator. They’re the ones likely to end up working for a company again.”
Most business plans are simple documents designed to explain the venture to investors, whether a bank, relative or investment group. Though you might have no need to reach “investors” other than someone to loan you money to buy a truck, a business plan still can help you guide your operation long-term by predicting costs and income. You can do this by combining concrete facts with sound estimates based on an understanding of trucking industry cycles.
Many small-business owners avoid producing written plans because it seems unnecessary. “They think ‘Can’t I just do this in my head?'” says Tim Berry of Palo Alto Software, a company that sells software for writing business plans. “For a lot of simple businesses like those run by owner-operators, the owner focuses on doing the job, managing their cash and planning their future – they just do it all in their heads.”
That’s what owner-operator Greg Hall of Cottage Grove, Minn., does. The Dart Transit driver says he could write down his goals, his financials and his business model, but he doesn’t need to. “I know what it’s going to cost me each day to operate my truck,” he says. “I know that per day, per quarter, per year. I also know what I need to do to meet those expenses.”
Hall is an exception, say small-business advisers. Most owner-operators need a plan in writing that tells them where they’ve been, where they are going and how they’re going to get there.
The plan’s value isn’t limited to new owner-operators, says Charles Epstein, president of BackBone Inc., a small-business consulting firm. “Even if you’ve been a small-business owner for years, it’s a good way to look at your operation as a new business,” he says. “It’s a good way for you to organize your thoughts.”
A business plan doesn’t have to be dozens of pages or even well written, Berry says. “It can be as simple as what you plan to spend and what you plan to earn,” Berry says. “It can be a month-to-month budget including notes to yourself about what are your business priorities and why. Maybe you need to buy a new truck in two years. That should be in there.”
A business plan will include information on your budget, how you plan to pay for your truck, the kind of freight you plan to haul, the company you lease to (or if independent, the companies you haul for) and how many miles you expect to drive. The plan will also lay out your expectations for business cycles and set a schedule for time off.
Accounting for those cycles is a key element of a business strategy because there is no excuse for being caught off guard by something you can predict, such as slow freight cycles. Likewise, a good business plan will act as a guide when your business expectations are not being met or when something in your personal or business life changes substantially.
A typical trucking business plan might contain:
- A summary describing your business and its mission.
- Your goals and how you will achieve them.
- A description of your market – who you’re leased to, what you haul, the number of miles you drive, your cost per mile, and key factors such as fuel prices and surcharges, freight availability and seasonal cycles.
- Information about your truck, your plans to finance it and maintain it, and how often you will replace it.
- Your budget, including the number of miles you must run just to cover your fixed and variable expenses.
If your spouse or a partner is involved in the business, that relationship should be spelled out.
“When you have a husband and wife team, you have to make sure you don’t get too casual or too informal about business issues,” says Rich Sloan, who is part of the Sloan Brothers, a nationally syndicated small-business radio program. “It’s very important that you define roles. The trucker knows that he’s trucking, the administrator knows that she is administrating. That way there are no arguments about who’s supposed to do what.”
This is also true when you employ others. Employees or partners should see the business plan and buy into it. “As soon as you’re dealing with a second person, the business plan becomes much more important,” Berry agrees. “People need to understand each other: about what they’re doing and where they’re going.”
Your plan should also list tangible business assets, such as your truck, trailer and computers, says Dawn Josephson, a business writing consultant and author.
You may also want to include an exit strategy, addressing what you’ll do if your operation becomes less profitable, advisers say. It also might include retirement plans, especially if you’re older.
Business plans are often put in a drawer and forgotten after being used to solicit a loan. But to be useful, a plan must be revisited frequently. The Amen brothers suggest reviewing your business plan every time there’s a major event and also when you’ve gone though a business cycle, whether annually, quarterly or monthly.
“Look at it as you do your monthlies or turn in your taxes,” echoes Barry. “Ask yourself, ‘Is this what I planned?’ If not, figure out why it’s different. And either adjust your business or adjust your business plan.”
Following a business plan can be crucial to the success of an owner-operator business. “The failure rate for truckers with business plans is a lot lower,” says Todd Amen. “Having one forces them to pay attention to all aspects of their business.”
YOUR BUSINESS PLAN BUDGET
A budget is the one element that a business plan cannot do without, says trucking accountant Todd Amen. “The budget is 80 percent of a business plan,” he says. “If you have nothing else and don’t understand anything else, you need to understand budgeting.”
Some owner-operators project their budget beyond one year to coincide with the full term of their truck financing and the changing projections for maintenance costs as the truck ages. Here’s the basic approach:
- ESTIMATE REVENUE
First, determine the number of miles you expect to run each month, considering seasonal changes in freight cycles and personal needs. Freight typically slows in winter, for example, so you might want to take some time off to be with your family, especially during the holidays. On the other hand, when things pick up in summer, you’ll want to be ready to run.
Multiply total miles by your revenue per mile. For instance, if you run 135,000 miles during the year, and your carrier pays you 90 cents per mile, your estimated gross revenue is $121,500.
If you’re an independent, determine your average pay per mile and plug that in to your formula. Freight availability affects rates, so business cycles will affect you more than they will leased owner-operators.
- LIST FIXED EXPENSES
These are predictable expenses that do not change, such as your truck payment. They include annual expenses, such as licenses and permits, that should be listed only once, in the month you pay them, as well as more frequent expenses, such as quarterly estimated income tax, which should be listed four times.
- ESTIMATE VARIABLE EXPENSES
Variable expenses change with the number of miles you run, the routes you travel and fluctuating prices. These include fuel, maintenance, repairs, tolls and tires. If your route includes the Pennsylvania Turnpike, for example, expect to spend about $100 one way on tolls. By comparison, if most of your miles are through the Southeast, you won’t encounter many tolls.
Fuel is the most challenging part of budgeting variable expenses because it can fluctuate so greatly and it is an owner-operator’s biggest operating expense. Savvy owner-operators follow fuel prices closely and adjust their business plan according to seasonal changes and major swings in oil prices. A mere nickel increase in the cost of diesel can cost more than $1,000 extra per year.
When estimating variable expenses, go a little high. For example, if you need 10 oil changes per year and you expect charges between $100 and $130, estimate each change at $130, or $1,300 for the year, to be safe.
- FIND NET INCOME
Add your fixed and variable expenses. Subtract that total from your estimated gross revenue. What’s left – your net income – is what you pay yourself to cover non-trucking expenses.