Partners in Business: Understanding costs

THIS ARTICLE IS FROM the 2006 edition of the Overdrive Partners in Business manual, co-written by American Truck Business Services, presenter of the Partners in Business seminars. The program is sponsored by Freightliner Trucks and Castrol. The next seminar will be Aug. 25, during the Great American Trucking Show in Dallas. Visit this site. To order the manual, call (800) 633-5953, Ext. 1135.

Revenue is only half the profit equation. Cost is the other half. Being able to thrive as a business owner has as much to do with managing costs as with generating revenue. Like the chief financial officer of any company, you have to be concerned about rising costs – especially without increases in revenue. But as many owner-operators will tell you, trying to make sense of costs, let alone reduce them, can be a complicated task.

Understanding some basic principles of operating costs can save you thousands of dollars a year.

A PENNY SAVED IS $1,300 EARNED. The owner-operator who can save just one penny per mile over 130,000 miles driven annually will save $1,300 in a year.

COSTS per mile ARE NOT THE SAME EACH MONTH. If you drive 10,000 miles one month and 12,000 miles the next month, each month will have a different set of costs per mile, as shown in this example.

If your tractor payment is $1,850 per month, and you drive 10,000 miles in the month, your tractor payment will cost you 18.5 cents per mile.

However, if you drive 12,000 miles in the month, your tractor payment will cost you just 15.4 cents per mile. This is one of your major fixed costs. Fixed costs do not go down over time, but you can reduce their cost per mile by driving more miles.

The difference per mile here is only 3.1 cents, which may seem like small change, but remember that one penny saved per mile can add up to $1,300 in a year. In this example, the difference in fixed cost is over $4,000 in a year. That amount will either go into your pocket or come out of your pocket, depending on the decisions you make.

FOR EVERY EXTRA DOLLAR OF REVENUE GENERATED, ONLY PART OF THAT DOLLAR IS PROFIT. But when an extra dollar of cost is saved, that entire dollar contributes to your profit.

COSTS CANNOT BE UNDERSTOOD ON A PER-MILE BASIS ALONE. In the example above, the 12,000-mile month results in a lower cost per mile. Also, as the cost per mile is lowered, revenue goes up for driving the extra 2,000 miles – a double benefit for each additional mile driven.

To gain a better understanding of costs, it’s helpful to break the discussion into two types of costs:

FIXED COSTS – THE COST OF TIME. A fixed cost is a cost that already has been determined and does not change from month to month. Any expense related to time – such as a tractor payment, insurance payment, permits and license fees – is a fixed cost.

For every day you own a truck, there is going to be a specific cost. That cost will be the same every day whether your truck is driven one mile or 600 miles. It is a daily fixed expense and has to be confronted 365 days per year. You are challenged daily to bring in revenue to set against it.

VARIABLE COSTS – THE COST OF DISTANCE. A variable cost is related to how much you drive. Fuel, tires and maintenance are good examples. Most variable costs will remain the same for every mile you run.

These are the costs that are required to move your truck the distance your load requires. Think of variable costs as the cost of distance. Variable costs are what make your truck go down the road.

HOW TO APPLY FIXED AND VARIABLE COSTS TO YOUR BUSINESS. The typical owner-operator has a variable cost of 33 cents per mile and a fixed cost of $100 per day. Below is an example of how to apply fixed and variable costs to your business. In this example, assume pay of 96.5 cents per mile.

Note that in Example A, because of low miles, the driver lost money.

In Example B, the driver is making a fair living with money to pay himself for driving.

And in Example C, the driver has money left over for profits, savings and retirement after paying all expenses.

Also, note how fixed cost per mile was reduced in the successive examples.

EXAMPLE A EXAMPLE B EXAMPLE C
Miles traveled in 7 days 1,057 2,200 3,300
Total revenue (96.5 cents x total miles) $1,020 $2,123 $3,185
Variable cost per mile 33 cents 33 cents 33 cents
Variable cost – total (33 cents x total miles) $348 $726 $1,089
Fixed cost ($100 x 7 days) $700 $700 $700
Fixed cost per mile 66.2 cents 31.8 cents 21.2 cents
Total cost $1,048 $1,426 $1,789
Total cost per mile 99.1 cents 64.8 cents 54.2 cents
Profit/loss -$28 $697 $1,396
Profit/loss per mile -2.6 cents 31.7 cents 42.3 cents
YOUR BUDGET
YOUR ACTUAL COSTS
Miles traveled in 7 days
Total revenue ( cents x total miles)
Variable cost per mile
Variable cost – total ( cents x total miles)
Fixed cost ($ x 7 days)
Fixed cost per mile
Total cost
Total cost per mile
Profit/loss
Profit/loss per mile
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