Owner Operator Expenses - Fixed Costs vs Variable Costs
What is it?
Total Fixed Cost vs Miles Driven (thousands)
Fixed costs are the expenses you pay regardless of whether you drive or not. The biggest fixed costs are usually Loan Payments and various Insurance Premiums. You will pay for these even while your truck is sitting. Other examples include: licensing, permits, accountants, cell phone.
Total Variable Cost vs Miles Driven (thousands)
Variable costs are the expenses you pay while driving your truck. The biggest variable cost is Fuel. You only pay for these expenses when you are operating your truck, and the amount you spend tends to increase as your miles increase. Other examples include: tires, maintenance, food, tolls.
Why is this Important?
Knowing your fixed and variable costs will help you make decisions to increase the profitability of your trucking business. Knowing your fixed costs will let you determine how much it is costing you when you are not driving. You will know how much waiting that extra day for a load will cost you, or how much that extra day at home will cost you. Knowing your variable costs will let you determine how much it costs you while you are driving. You will know how much fuel, maintenance, food, etc cost you for every mile you drive. You can locate problem areas and try to reduce those costs to increase your profits. You can even combine your knowledge of your Fixed and Variable costs to determine how much a deadhead will cost and factor that into your decision.
Reducing your costs
Fixed Costs: There isn’t a lot you can do to reduce your fixed costs, but it may be easier than you think. You can:
- try to lower the interest rate on your truck loan (not always easy or even possible)
- shop your insurance to reduce the premiums
- run more miles**
Fixed Cost per Mile vs Miles Driven (thousands)
That’s right, you can reduce the effect
of your fixed expenses by running more miles. This works because it lowers the cost per mile of those expenses. The amount of the fixed expense stays the same, while the number of miles increases, so the cost per mile decreases. You can see this relationship in the graph to the right.
**The cost per mile not the overall cost is reduced, so I don’t want you to feel misled, but it still means more money in your pocket.
Variable Costs: There are many things you can do to reduce your variable costs, and this is where cost cutting gets a lot of attention. You can:
- try to increase your fuel mileage (driving habits, tire rolling resistance, more aerodynamic parts)
- try to decrease maintenance costs (using preventative maintenance, using better quality parts, equipment replacement)
- you can decrease food costs by preparing food for yourself on the road