Knowing the cost per mile for all your expenses adds up to success.
Robert Saberhagen of Lehigh Acres, Fla., has been in the moving business 30 years, an owner-operator the past three. Leased to Bekins, he moves household goods in the summer, trade shows in the winter and a steady stream of numbers all year long.
Those numbers are his costs, his revenues and his miles. In order to manage them, Saberhagen tracks them religiously. He passes them to his accountant, who sends him more numbers in the form of monthly profit-and-loss statements. Saberhagen scrutinizes those numbers as well in order to better manage his operation. To Saberhagen, trucking is a numbers game.
“Your accounting is your No. 1 priority,” Saberhagen says. “If you don’t know where your money is going, you’re going to go broke. It’s that simple.”
Knowing your overall cost per mile and all your subsidiary costs per mile – fuel costs, maintenance costs, insurance costs, even food and drink costs – is vital to running a successful business, says Indianapolis accountant Gary Aitken, who has specialized in owner-operators for 36 years.
“It affects your operation of the truck, your payment of estimated taxes, your retirement planning – every aspect of your business,” Aitken says. “And yet, most owner-operators don’t have any idea of their cost per mile.”
Saberhagen agrees. “Most drivers don’t have a clue what their costs are, and when they do, they lie.”
Too many owner-operators just pass all their receipts to their tax preparer without studying them year-round and using the information to run their business, Aitken says.
Owner-operators who pride themselves on independence should realize that if they don’t know their cost per mile, they’re letting other people run their business. “They’re running like they work for the company, just going wherever they’re sent and not thinking about their costs,” Aitken says.
Understanding how much each run will cost, on the other hand, tells you how much profit you’ll make or whether you’ll make any profit at all. Many owner-operators use their CPM to set a target PPM, or profit per mile. If a haul won’t earn enough profit, they pass it up for a better haul.
If you know your cpm is greater in Appalachia than on the Great Plains, or greater when hauling office paper than when hauling breakfast cereal, you can select loads more wisely and make more money, even if your miles stay the same.
Realizing that your fuel cpm is creeping up faster than the price at the pump might indicate your truck needs maintenance. Better to find this out in advance by tracking costs than to find it out through a breakdown.
If you keep your truck in good condition, yet your maintenance cost per mile keeps creeping upward, it might be time to buy a new truck.
Calculating your costs is the first step in reducing them. Start with this formula: CPM = cost -: miles run. Suppose in 2004 you ran 120,000 miles and had $80,000 in total expenses. Your CPM for the year is $80,000 -: 120,000, or 67 cents.
If you’re paid by the mile, comparing mileage rate to cpM immediately tells how you’re doing. If you’re paid on a percentage basis, you still need to know how much money you’re making beyond expenses, and figuring your cpM will tell you that. Just do a bit more math: To figure revenue per mile, divide your overall pay by the miles you ran, then compare that RPM to your CPM, just like your buddy who’s paid by the mile.
Note that you can figure your CPM not just by time period, but by individual load or type of load. Maybe some of your regular loads are so unprofitable that you’d be better off turning them down. You won’t know that without running the numbers.
You also can break your total CPM down into its component costs. It’s important to distinguish between fixed costs, which are the same no matter how many miles you run, and variable costs, which go up and down with your mileage. Truck payments, insurance and heavy-duty truck taxes are examples of fixed costs; fuel, tires, maintenance and food are examples of variable costs. Knowing your fixed CPM is important, but tracking your variable CPM month to month, run to run, really enables you to make smart changes in your business.
The biggest variable cost, of course, is fuel. “If all the truckers who complained about fuel prices actually knew their fuel mileage and their fuel cost per mile, they’d be better off,” Aitken says.
Suppose your truck gets 6 mpg, and you ran 6,000 miles in a month, meaning you burned 1,000 gallons (6,000 divided by 6). If the cost of diesel averaged $1.95 per gallon that month, your total diesel cost was 1,000 X $1.95, or $1,950. Your fuel CPM was $1,950 divided by 6,000, or 32.5 cents – likely the largest single chunk of your total CPM.
Now suppose you ran 10,000 miles that month. At 6 mpg, you burned 1,667 gallons (10,000 divided by 6). Your total diesel cost was 1,667 X $1.95, or $3,250.65. Your fuel CPM was $3,250.65 divided by 10,000, or 32.5 cents. Note that even though your fuel bill went up with your mileage, your fuel CPM stayed the same, because the pump price and fuel economy didn’t fluctuate.
Suppose the next month you also run 10,000 miles, and the pump price stays at $1.95, but when you do the math, you learn that your fuel CPM went up a penny, to 33.5 cents. That means your fuel economy has worsened for some reason. Maybe the cause is simple – your hauling terrain changed, or you had to idle more to stay cool or warm at night. Or the loss in fuel economy could point to something that will save you money if you address it, such as tire or engine maintenance.
Calculating and tracking how much you regularly spend for even the smallest items, Aitken says, will help you change your buying habits and save more money.
“You can pay more for a bottle of drinking water than for a gallon of diesel fuel, and there’s just something wrong with that,” Aitken says. “These are little things, but it’s the little things that add up during the year.” If you’re not thinking about those purchases and just buying on impulse, you’re letting advertisers and marketers do your thinking for you, he says.
Saberhagen agrees. “Everything you buy, you have to shop for, right down to the socks you wear. You always can get it cheaper somewhere else.”
Note that even if you’re being paid more than ever, thanks to high freight demand and decent fuel surcharges, you still could be in trouble – at least in the long run – if your CPM is too high.
In flush times like these, it’s human nature to get careless about counting pennies, Aitken says. But flush times never last forever, and the owner-operator who’s careless about his costs now will find it’s too late to mend his ways when the economy heads south.
“People think that if they can just get more miles, their problems are solved,” Aitken says. “The answer isn’t more miles; it’s getting more per mile. It all comes down to understanding your dollars and cents.”
DON’T LET YOUR TIRE RECORDS GO FLAT
After fuel, tires are an owner-operator’s biggest variable cost, so figuring their cost per mile is important. But doing so requires careful recordkeeping throughout the life of each tire, experts say.
“It’s not difficult at all, as long as you have the discipline to track the numbers,” says Curtis Decker, a field engineering manager for Continental Tire.
When you purchase a tire, record its price, manufacturer, type (steer, drive, trailer), wheel position and, ideally, its tread depth in 1/32-inch increments, the industry standard. Also record the mileage at which each tire is installed.
In the months to come, add to each tire’s record whenever it’s taken out of service, recapped or rotated to another position. Note the mileage and tread depth at each stage. Various companies, including Continental, offer tire-tracking software to help with these tasks. Many truckers create their own databases, using Excel or other programs.
In just a year’s time, this information enables you to figure each tire’s CPM, which is its total miles divided by its total costs. You can also break down this information by manufacturer or position, giving you vital data for making the next tire decision, Decker says.
Even minor tire troubles need to be recorded. An emergency roadside service that costs $1,000 might make a bigger impression, “but every time you catch a nail and need repair, you need to track that cost, too,” Decker says. “Over time, there are no small costs. They all add up.”
HOW FUEL COSTS GET PUMPED UP
All other factors being equal, fuel CPM should go up or down in proportion to the price at the pump. There are many possible reasons, however, for the two figures to be out of sync. An owner-operator who regularly calculates CPM can notice the difference early and quickly identify likely culprits.
The five most important factors affecting fuel economy, according to a 2003 International Truck and Engine study, are:
- Drivetrains, including wheel and axle alignment and transmission ratios.
- Tires, especially pressure.
- Engine efficiency.
- Driver performance, especially habits of speeding, braking, accelerating and idling.
Other factors abound, including:
- Age and efficiency of oil and air filters.
- Type of trailer and load.
- Type of terrain driven through.
- Level of traffic congestion.
- Weather, especially temperature and wind conditions.
- Whether cab windows are open or closed.
According to the Technology and Maintenance Council of the American Trucking Associations, a Class 8 truck could save 844 gallons of fuel a year if its operator just kept all the fluids topped off with low-viscosity grades – meaning not just oil but all transmission, drive axle, air conditioning, power steering and wheel end fluids. At $1.95 a gallon, saving 844 gallons equals $1,645.80.