Fixed Expenses as an Owner Operator
Fixed Expenses Are Those That Go On Whether You Run Or Not
Your "wheels" are a huge investment - the key is to keep them
Many of your major fixed expenses are paid on a monthly basis. A change in utilization dramatically affects your
FIXED cost per mile (CPM) and your bottom line.
What follows is a review of the fixed expenses in a typical over-the-road Class 8 operation and projected
monthly costs, along with some general comments.
This approach will help you project your "cash flow" planning dollars. It may vary somewhat from your tax number
projections, due to depreciation, other deductions, etc. A rule in any business is that "You need cash flow first
to get to profitability."
BASIS OF CALCULATIONS
For ease of showing the relationship of monthly dollars to CPM, we have used an industry average utilization of
10,000 miles per month and calculated the resulting CPM. If your business receives weekly settlements with
deductions, simply multiply those dollars by 4.33 weeks per month to get to your monthly dollar projections.
We suggest using this information to think through your own operations, when looking at contracts, and when
assessing how an increase in utilization impacts your CPM and profitability.
- Tractor Payment - This is your largest fixed cost, unless your equipment is significantly paid down or paid
off. Most lease-type arrangements are totally deductible. Otherwise, you deduct interest and depreciation. A new
premium tractor today without a trade or buy-down will cost about $2,000 per month ($90,000 for 5 years @ 12%
interest). At 10,000 miles per month, this is $0.20 per mile.
- Trailer Payment - Many of you who are leased to fleets will not have this expense as it is rolled into your
contract. For those of you operating with your own authority or with a fleet where you use your own trailer, the
financial issues are the same issues as with your tractor. A new van or flat trailer today can cost from $500 per
month ($20,000 - same terms) versus a new reefer trailer from $1,000 per month ($45,000 - same terms). Again just
divide the monthly expense by 10,000 miles per month to get your CPM, in this case $0.05 up to $0.10 per mile.
- Licensing / Permits - This cost varies with the base plate State and how much you operate in each State.
Contractor fleets may either include these in their contract or deduct part or all of the costs over time. For
planning purposes, a typical annual cost for an over-the-road company is about $2,000 per year. Your costs may be
different, depending on where you run. Trailer plate costs are relatively inexpensive as compared to the tractor,
again varying by State. For 10,000 miles per month, this CPM is $0.017 per mile.
- Federal Highway Use Tax - While the 2290 is only $550 per year, it is needed for licensing and is your
responsibility. This costs out to be about $46 per month or $0.005 per mile.
- Liability / Cargo Insurance - If you operate with your own authority or with some fleets, these coverage's are
based off of revenue, are really variable expenses, and are addressed on that page in our site. Some fleets,
however, fix this cost at a weekly or monthly rate and deduct it on settlements. In addition, others offer "bridge"
policies at a fixed cost. Typical monthly costs in these cases are up to $500 per month for liability and $100 per
month for cargo. This costs out to be up to $0.06 per mile.
- Collision / Physical Damage Insurance - This is based off of your equipment value. While some call this a
variable expense because your equipment value changes over time, it is best to consider it a fixed expense, as you
must pay it whether you run or not. Typical annual rates for a tractor range from 3% to 4% of your insured value.
The new truck example as noted previously ($90,000 @ 3%) would be about $2,700 per year or $225 per month. This CPM
at 10,000 miles per month is $0.023 per mile.
- Bobtail Insurance - When you purchase liability insurance under your own authority or through a contractor
fleet, bobtail is included. If the contractor fleet provides liability insurance in the contract, bobtail insurance
is usually required. Bobtail insurance is often a catch-all description for non-trucking liability (NTL) up to more
inclusive programs, with costs varying from $40 to over $100 per month. You need to talk to your contractor fleet
to make sure you have the proper coverage. This CPM at 10,000 miles per month is $0.01 per mile.
- Health / Life / Disability Insurance - While this may be considered a personal-type expense, it is an
important part of your risk reduction strategy. Disability is also covered in part under Workers Compensation
(below). These costs vary with your personal considerations, but are a monthly on-going expense. Average costs can
vary from $100 per month for a young individual to $500+ per month for a family. This CPM at 10,000 miles per month
ranges from $0.01 to $0.05 per mile.
- Retirement Programs - This is another cost that should be addressed in your planning. Most tax and financial
planners will recommend you put back at least $2,000 per year. This is $167 per month or a CPM of $0.017 per mile
at 10,000 miles per month.
- Workers Compensation - If you are operating with your own authority, you are not required to have this
insurance unless you have employees. Some fleets do require that you have insurance through your State Workers
Compensation Authority or a substitute Occupational Accident (OCAC) program. Different individuals, companies and
States may differ on what type policy is proper for your circumstances. You need to ask what is appropriate for
you. OCAC policies can average $130 per month while State programs can be double that. Using $130 per month at
10,000 miles per month, the CPM is $0.013 per mile.
- Fixed Office Costs - If you operate with your own authority, this includes many of the administrative costs as
listed on the revenue page. For those with their own authority or contracted to others, this might include what you
pay a spouse / relative, facilities costs, etc. For planning purposes, we estimate these costs at an average of
$1,500 per month, or $0.15 per mile for 10,000 miles per month.
LOOK AT THE EFFECT OF UTILIZATION ON COST PER MILE
Add up these numbers up at 10,000 miles per month
Tractor Payment - - - - - - $2,000 / month OR $0.20 / mile
Trailer Payment - - - - - - - - $500 / month OR $0.05 / mile
License / Permits / 2290 - - $200 / month OR $0.02 / mile
Liability / Cargo - - - - - - - - $600 / month OR $0.06 / mile
Collision / PD / Bobtail - - - - $325 / month OR $0.033 / mile
Health / WC / Retirement - - $800 / month OR $0.08 / mile
Office Costs - - - - - - - - - - $1,500 / month OR $0.15 / mile
- OWN AUTHORITY FIXED COSTS - $5,925 / month or $0.59 per mile
- LEASED TO FLEET FIXED COSTS - $3,325 / month or $0.33 per mile
AND just increasing utilization 100 miles per week (<20 miles per day) gives us the following:
- OWN AUTHORITY FIXED COSTS - $5,925 / month or $0.57 per mile
- LEASED TO FLEET FIXED COSTS - $3,325 / month or $0.32 per mile
Try this exercise on your fixed costs. The result is huge.
THE BOTTOM LINE
- Whether you are operating with your own authority or through a fleet, all parties have an interest in
maximizing utilization, as the mutual benefits are huge. Even if you are leased to a fleet, you benefit more than
the fleet does because your fixed costs are higher than theirs.
- Utilization has a bigger effect on your profitability than any other aspect of your business - RULE OF THUMB -
100 MILES PER WEEK AFFECTS FIXED COSTS AND YOUR PROFITABILITY $0.01 PER MILE (AT LEAST)
- Lowering your fixed costs also lowers your CPM. Since your largest fixed cost is your equipment, financial
planning may help you lower your interest rates and payments. Check out our equipment-financing page for tips that
may help with that.
Printed with permission
Transportation Business Associates
Business Services for the Transportation Industry
P. O. Box 17531
Denver, Colorado 80217-0531