Demand for freight transportation is down one period and up the next. The one thing that doesn’t change; margins remain slim. How is it possible to keep making profits in this unpredictable environment? The simple answer to grow profits is to increase rates, drive more revenue generating miles, reduce costs, or any combination thereof. Sounds easy right, but how do you know which of these three elements to change and what effect it will have? Truck company owners need an effective way to monitor fleet operations, optimize equipment utilization and curb spending where required. The best method is to perform monthly analysis with a trucking company profit calculator to monitor your company’s performance and to determine if operational changes are needed. Trucking Business Profit - It’s Simply Complex Profit is a relationship between the cost of doing business and revenues generated to produce financial gain. In the trucking business, this simple relationship can be awfully complex. There are only two ways to generate more revenue; increase rates or drive more miles, but multiple ways to reduce costs. Each element of the relationship affects the other creating an elaborate web of interchangeable results. To predict how change will impact profit margins, you must create “what-if scenarios”. Calculate Your Trucking Company Profit Margins Trucking Industry Profit Margins - What-If Scenarios What if you sell your late model truck and buy an older used truck to get rid of heavy monthly payments? It’s an unusual decision, but bound to make a positive difference in month end profits right? Perhaps not. If the fuel efficiency of the older truck is far less than the late model, your additional fuel costs could easily overshadow savings. Now you’re driving an older truck and making less money. Instead, what if you drive more miles to generate more revenue? That will increase over-the-road costs, maintenance expenditures and driver wages. How do you know what the benefit will be? The easiest, fastest and risk-free way to predict results is to create “what-if scenarios” in a company profit calculator. A good calculator will spread the results of change across your operational base and show the big picture result as having either a positive or negative impact on profit. Know Your Costs Accessing enough working capital to cover costs and keep operations moving is a common problem that may threaten the success of your trucking business. Fortunately there are excellent funding options designed specifically for small growing fleets and larger established fleets to meet this challenge. A larger, more dangerous threat is the possibility of losing money each haul without realizing it. Each haul has associated revenue and costs. In order to determine a profitable freight rate you have to know ALL the costs affecting the load. These costs are broken down under three categories: Running Costs (variable costs), Fixed Truck Costs, and Fixed Overhead Costs. Knowing these costs and applying accurate data to the calculation is critical to gaining meaningful insight into your business. Contribution Margin and Net Profit Running (variable) costs are directly associated with the operation of trucks. The more miles you run, the more variable costs mount up. Fixed costs are much different, they are not associated to the operation of trucks, but rather the operation of the business. These costs remain constant no matter how many miles your trucks run. When you subtract the variable costs of a trip from the revenue it generated, the amount left over is known as the “Contribution Margin”. This amount is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit. Adjusting Your Average Trucking Company Profits Conduct monthly business analysis in this fashion to identify your average company profits. If analysis shows that your current rates are too low in a particular lane, then you should raise rates to compensate. Make sure to compare competitive rates so as not to price yourself out of the market. The alternative is to drop any poorly performing lanes and find other more profitable lanes, or simply drive more revenue generating miles each month. We will discuss setting rates in more detail in an upcoming article. Once you have completed your analysis and compare results month over month, you may realize that you need to change the daily decisions being made that affect operations. If this is the case, you will need to consider: Increasing revenue generating miles Reducing dead head miles Increasing your rate per mile Dropping unprofitable lanes and take on new more profitable lanes Being more selective when accepting freight from load boards and freight brokers Reducing costs wherever possible Create incentive programs for drivers and dispatchers to improve revenues and reduce costs The main point of this article is to draw attention to the extreme importance of knowing your costs. Using accurate costing data to gain insights will guide your decision making process that affects your bottom line. It is advisable to consult with a professional accountant knowledgeable in trucking to assist in organizing your books. Dave Boyd is an experienced accountant/controller specializing in trucking. His claim to fame is to make what’s complicated simple. For example, the simplest way to calculate fuel costs per mile is to divide the cost per gallon by the MPG of a truck. David can help you get the most out of the profit calculator and can be contacted through LinkedIn. Small Company and Owner Operator Net Profit Whether you are a startup business or a growing fleet, you should conduct this analysis every month to evaluate net profit. This work practice will determine whether or not to continue operations as is or make the necessary changes to stay in business and become profitable. To make this ongoing effort quick and simple, we have created a trucking business profit calculator designed for small company owners and independent owner/operators. Use our calculator as often as needed to ensure the success of your business!