Variable Expenses for Owner Operators
Owner Operator Tutorial
Variable Expenses for Owner Operators
These Daily Operational Costs Show Up As $$$ — Knowing Your Cost Per Mile Helps With Planning & Improvements!!!
Running fast may be fun – but it costs – fuel, tires, brakes & tickets and also WEARS YOU OUT!!!
Like revenue, your on-road expenses, maintenance costs and other expenses are directly related to the miles you run. While many of these costs come in as “dollar” expenses, it is very important to know the cost per mile (CPM) of each item, for profitability and planning purposes.
What follows is a review of the variable expenses in a typical over-the-road Class 8 operation. We have combined industry supplier planning numbers and some general tax planning percentages with actual operational input to get to some projected monthly costs and CPM. Also included are some general comments.
These numbers may vary somewhat from your tax dollar projections, due to the partial deductibility of food, home office rents, personal insurance programs and any other deductions that your tax specialist may help you with. Again, these projections should be used for planning purposes and only in a “cash flow” profitability analysis.
BASIS OF CALCULATIONS
For ease of showing the relationship of CPM to monthly dollars, we have used an industry average utilization of 10,000 miles per month and calculated the resulting dollars per month. If your business receives weekly settlements with deductions, we suggest averaging all but your fuel costs over a longer period of time (monthly or even annually) to smooth out any swings.
We suggest using this information when looking at industry / fleet programs and looking at how to lower your individual expenses. Independent of your fixed costs, your variable CPM savings multiplies as you improve utilization, adding even more to your bottom line.
– Fuel – This is your largest cost behind payroll. Price does make a difference (“nickel per gallon = a penny per mile” – see “Assessing Surcharge” page).
To project your fuel costs, you first need to know your fuel CPM. For planning purposes, you can calculate it two different ways. The first and most accurate way is to take your actual dollar expenses over a period of time and divide it by all routed HHG miles (or fleet paid miles).
The second way gives a more current estimate and is the way surcharge is calculated. That is simply to divide your average pump price in cents per gallon by your fuel mileage in miles per gallon.
With fuel prices at $1.50 per gallon and you getting 6 miles per gallon, your CPM is $0.25 per mile. Multiply that by 10,000 miles per month and the planning cost is $2,500 per month. Reefer fuel would add to this.
NOTE: When the pump price drops below $1.20 and surcharge is no longer in effect, a good fuel planning cost is $0.20 per mile or $2,000 per month. If prices go below that, plan as if it were a gift.
– Fuel Transaction Fees – For those using cash to buy fuel, this is not an issue (unless you have drivers). While this seems like a minor dollar cost issue in the total scheme of things, it can add up.
If you use cash-card programs or credit cards to buy fuel, the fees are only one part of the issue. The other involves the amount of fuel purchased each time. If you buy $100 worth of fuel at a time and pay a $5.00 fee, the transaction cost is $0.01 per mile. At 10,000 miles per month, this is $100 per month.
– Road & Fuel Taxes – This cost is the amount of tax dollars owed from miles operated in each state minus that amount paid as tax through fuel purchases. Attentive operators can minimize this cost, but there are some states where the difference is notable.
As a rule of thumb for a US nationwide operator, a planning CPM is about $0.015 per mile (penny and a half). For those operating on the West coast (especially Oregon) or in some Provinces in Canada, this CPM can approach $0.05 per mile. Using the CPM of $0.015 per mile with 10,000 miles per month, this monthly planning cost is $150.
– Routine Servicing / On Road Oil – This includes your routine oil / filter and chassis lube, along with any add-oil between servicing. The way to plan your servicing CPM is to divide the price of a complete service in dollars by your service interval in miles.
If you use an average cost of $150 per service with a 15,000-mile interval, the CPM is $0.01 per mile. If you are running special oils and extended intervals, do the same calculation with your numbers. At 10,000 miles per month, this planning cost is $100 per month.
– Maintenance, Repairs & Tires – This includes other than routine service items from light bulbs, wipers and windows to brakes, clutches, engines and tires. We suggest escrowing these into a separate account, as many otherwise spend it. While minor repair items can be cash flowed relatively easily, the first major item that most are guaranteed to have to purchase is tires.
Industry suppliers and actual experience indicate that one should plan about $0.04 per mile for tractor maintenance, $0.01 per mile for trailer maintenance, $0.02 per mile for tractor tires and $0.01 per mile for trailer tires. These numbers vary with the age of your equipment, operations, trade cycle, etc. At 10,000 miles per month, this planning cost is $600 per month for a tractor and $200 per month for a trailer.
– Liability / Cargo Insurance – As noted on the “Fixed Expenses” page, most contractor fleets include these as a part of their contract. If you operate with your own authority or it is deducted in a settlement and not a fixed cost, it is calculated as a percentage of revenue.
Liability insurance for a single unit operator can be expected to be around 4% of revenue. Cargo insurance would add another 1%. If gross revenue were $1.20 per mile, the CPM would be $0.06 per mile. At 10,000 miles per month, these would total $600 per month.
– Tolls, Scales, Unloading & Other On-Road Costs – These costs should be clearly understood by carriers and operators, and properly addressed with shippers. If you operate with your own authority, these costs need to be considered in your rates. If you are leased to a fleet, they may or may not be included in your contract, or may be handled as reimbursed expenses.
There are tax and profitability implications here, too. In general if you are leased to a fleet, you are not 1099ed on reimbursed expenses (including trailer repairs). If you take a week where you spend just $25 in tolls, $15 in scales and $80 in unloading, the monthly costs could be over $500 or $0.05 per mile. You can see how these can add up.
– Office, Legal & Accounting – This is one that may be a fixed or variable expense. Careful consideration should be given to how you handle your legal setup, financial management and tax preparation.
Successful business people will “always” say that useful on-going feedback is key to their success. Many pay their spouses, relatives or others to perform these functions, which may be a good tax-planning strategy. Some use accountants or a mix of both. Please take a look at our “Industry Services – Accounting Information” page for additional information.
These costs can vary from $200 to $1,500 per month, depending on the approach. At 10,000 miles per month, this ranges from $0.02 to $0.15 per mile.
– Communication Costs – Telephones, pagers, E-mail and satellite communication are great tools for improving productivity. These are the total responsibility of you with your own authority. Contractor fleets often either handle these costs or offer reduced rate programs.
These costs vary with usage, but the industry target is about $0.02 per mile. For 10,000 miles per month, this is $200 per month.
VARIABLE COSTS AND CPM
Rolling up these numbers up at 10,000 miles per month – with fuel surcharge offsetting today’s price
Fuel / Fees / Taxes – – – – $2,250 / month OR $0.225 / mile
Truck Maintenance – – – – – $700 / month OR $0.07 / mile
Trailer Maintenance – – – – – $200 / month OR $0.02 / mile
Liability Insurance – – – – – – $600 / month OR $0.06 / mile
On-road Costs – – – – – – – – -$500 / month OR $0.05 / mile
Office Costs – – – – – – – – – – $200 / month OR $0.02 / mile
Communication – – – – – – – – $200 / month OR $0.02 / mile
When we add these numbers up for 10,000 miles per month
OWN AUTHORITY VARIABLE COSTS – $4,650 / month or $0.47 per mile
LEASED TO FLEET VARIABLE COSTS – $3,350 / month or $0.34 per mile
THE BOTTOM LINE
A number of important planning points are summarized in the following:
– Lowering the CPM of your variable expenses can have a notable affect on your profitability. Unlike your fixed costs where utilization will dramatically affect them, you must stay on top of each of these issues every day.
– Fuel is the largest operating cost in your business. As noted on our “Operational Costs” page, slowing down a little lowers your CPM significantly (5 MPH = $0.02 per mile). As explained on our “Assessing Surcharge” page, offsetting higher fuel prices through surcharge is the other way to address your fuel CPM (a nickel per gallon = a penny per mile).
– If you are leased to a fleet, you have the ability to minimize these costs through fuel programs, maintenance programs and communication programs. Other costs that you may not have to negotiate, obtain or manage include the following: the use of trailers, liability / cargo insurance and reimbursed expenses. While these costs are offset in the contract, your profitability is not greatly affected.
– To see how we put these numbers together, please visit our “Net Profitability” page.
– NOTE OF CAUTION – Before adding and subtracting these numbers, please read the following. If you attempt to add the numbers from the “Fixed” page with those from this page, you will find that some of the same expenses are entered on each page (i.e. liability insurance, cargo insurance and some office expenses).
We did that for the purposes of showing the different ways some look at the information. In addition, your revenue may increase where on-road expenses are paid in the rate, or reimbursed as expenses.
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|What is the Outlook for the Trucking Industry?|
|Should I Get My Own Operating Authority?|
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